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The Best Credit Cards For Paying Taxes

taxes

donkeyhotey on flickr

Since tax season is coming, I recently wrote about the basics of paying taxes with a credit card and if it’s worth it.  Doctor Of Credit wrote about the topic today as well.  Below, we discuss the best credit cards for paying taxes.

In that post, I highlighted that the minimum transaction fee for using your credit card is 1.87% offered by Pay1040.com.

If the rewards earned from the credit card are worth more to you than the 1.87% fee, then it’s worth using the credit card.  For a general example, let’s assume a tax bill of $5000.  If you used the Fidelity Visa which offers 2% back on everything, then you would come out ahead by 0.13% or $65 in this case.

However, there are certainly other cards and other situations which can make you come out ahead.  Below are some possibilites of cards that may make sense:

Cards that make you come out ahead with cash back:

  1. BBVA Compass NBA American Express Card – One of the highlights of this card is that is offers 5x points (5% cash back) on everything during the NBA All Star Weekend and 2 weeks of the NBA finals. For 2016, NBA All Star Weekend is Feb 12-14 and the Finals are June 2nd – 19th.  If you can get your taxes done in the next few days and you have the card, you could make payment with the card on the correct date and come out ahead 3.13% on your taxes.  You could also pay quarterly estimated taxes on the card if that better suits the 5x dates.  This card has no annual fee.  This may be the best card to use to come out ahead on your taxes.
  2. Bank of America Travel Rewards Card – If you have this card and you have Platinum Honors Status with Bank of America, then you are earning 2.62% towards travel credit on this card.   Mostpeople don’t have that status, but it’s included here to give specific examples. Although you can currently cash out that 2.62%, that benefit will be going away when the Fidelity Amex gets converted to a Visa.  So, if you used that card, you would come out ahead 0.74%.  This card has no annual fee.
  3. Discover it Miles Card – This card currently offer 1.5x miles (1.5%) on everything.  However, for new cardmembers, this 1.5x is doubled at the end of the year.  So, you will get 3%, thus saving 1.13% on your taxes.

“Buying” Points or Miles by Paying Your Taxes

  1. Starwood Amex – By paying with the Starwood Amex, you are essentially buying Starwood Points at 1.87 cents each.  That’s a decent price for SPG points.  The points are worth at least 2.2 cents per point and you can redeem them for much more value than that.  Starwood points also transfer to airline miles.  For most airlines, the ratio is 1:1, but when you transfer 20,000 points, you get an additional 5000 miles.  Thus, you are earning 1.25 miles per dollar spent with the Starwood card if you go this route.  With this in mind, you are earning airline miles at 1.5 cents per mile when paying taxes.  Since Starwood points are more difficult to earn than most other points currencies, this would be a good way to earn Starwood Points.
  2. British Airways Card – For some, the British Airways Visa still earns 1.25 miles per dollar.  With the same reasoning as above, if you used this card, you would be buying Avios at 1.5 cents a piece.  You can certainly get much more value than that out of Avios.
  3. Amex Everyday Preferred Card – This card earns 1.5 Membership Rewards Points per dollar if you make 30 transactions in the billing period.  Paying taxes with this means buying MR points at 1.25 cents per point, a very good value.
  4. Amex Everyday – This no annual fee card earns 1.2 Membership Rewards Points per dollar if you make 20 transactions in the billing period.  Paying taxes with this means buying MR points at 1.56 cents per point.

Paying to meet a minimum spend or reach a spending threshold

Personally, I think paying 1.87 cents per point for any miles or points currency is expensive.

There may be times when paying 1.87% may be worth it to you to reach a minimum spend or to earn a threshold bonus.  Here’s a few cards where you may be willing to pay the 1.87% fee to reach the bonus.

  1. United Plus Explorer – this card gives 10,000 bonus miles when you spend $25,000 on the card.
  2. AT&T Access More Card – you get an extra 10000 Thank you points when you spend $10000.
  3. Citi Hilton Honors Reserve -free night after $10000 spend.

Conclusion:

The lowest fee for paying taxes with a credit card is 1.87%.  Think about if you can come out ahead with a cashback card or see if “purchasing” miles or points is worth it to you.  It maybe worth it to you in the case of meeting minimum spend requirements or reaching spending thresholds to earn bonus miles or benefits.  Keep in mind that the 1.87% fee is tax deductible if you itemize deductions so your net cost for miles and points is probably even less than the calculations above.

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Paying Taxes With A Credit Card – Is It Worth It?

Tax season is around the corner.  If you pay quarterly estimated taxes, it’s always tax season.  Paying taxes with a credit card is easy and convenient, but does it make sense to do so?   Let’s take a look.

Paying Taxes With A Credit Card:

The IRS allows an individual or business to pay taxes with a credit card.  However, you have to go through a 3rd party processor.  That 3rd party processor charges fees for the transaction.  Visa, Mastercard, Discover, and American Express are all accepted. According the IRS site, there are now 3 processors which charge the following fees:

Keep in mind that these are the fees when you pay taxes directly online or on the phone with one of these processors.  The fees are different if you use a credit card to pay through an e-file software (i.e turbotax).

What are the fees if I use a credit card to pay taxes when e-filed through a software?

The fees are much higher when you pay through an e-file software, but are included below for completion.  It probably doesn’t make sense to pay such high fees.

credit debit fees efile

What taxes can you pay and how many payments can you make?

The table below from the IRS site lists what taxes you can pay and the limits on the number of payments you can make.  For people that pay estimated quarterly taxes (1040-ES), notice that the limit is 2 per quarter.  However, that’s 2 per quarter per processor.  With the three processors listed above, you could make a total of 6 payments.  There are reports that you can even make more number of payments if you pay on the phone.

payment limits personal

payment limits business

 

Your processing fees are tax deductible

You are paying a minimum fee of 1.87% fee when you pay taxes.  Keep in mind that these fees are tax deductible.  According to the IRS website and this article on Investopedia:

The Internal Revenue Service, or IRS, offers electronic payment systems for tax purposes, but other federal laws prohibit the IRS from directly paying any of the fees associated with debit or credit transactions. The IRS created a deduction in 2009 to offset the fee assessed by your credit card company when you make electronic tax payments. This deduction is included in your miscellaneous itemized deductions, which by law cannot exceed 2% of your adjusted gross income.

How can you check if payment has been received?

If you want to check that the IRS has received your payment, create an account on the Electronic Federal Tax Payment System (EFTPS)

If you pay through one of the processors above, your payment will post in a few days.  However, the IRS will recognize the date it was paid, not the date the payment posted.  Just pay before the deadline and you should be good.

Is it worth it?

The basic premise is that since the minimum processing fee is 1.87%, it would make sense to use a credit card only if the benefits exceed the fee.  For example, the Fidelity Visa gives you 2% cash back on every purchase.  So, paying your taxes on that would net you 0.13%.  On a $5000 tax bill, you would make $65.

If you prefer to collect miles or points, another way to look at it is that you are paying 1.87 cents per mile or point.  If you can redeem your miles or points for more than 1.87 cents each, then it could be worth using a credit card.  For example, SPG points can certainly be redeemed for over 2.2 cents in value.  Thus buying them for 1.87 cents each with the Starwood American Express might be worth it to you.

There are a few credit cards and other situations where paying taxes with a credit card would make sense. That deserves a post on its own, so look for that in the near future.

The same idea applies to paying property taxes as well.  If you pay property taxes, check with your county to see what processing fee they charge you for using a credit card.  If the rewards outweigh the fee to you, then go for it.

Of course, paying with a credit card is never a good idea if you can’t pay your bill in full when the statement closes.

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I received a targeted offer for bonus 2500 Southwest Rapid Rewards points for $5000 spend between Feb 1st and March 31st.


I have the Southwest Plus card, but it is also targeted on the Premier card.

So, they are essentially offering 1.5 points per dollar spent.  Since the value of Rapid Rewards points is roughly 1.5 cents per point, you are essentially earning 2.25 cents per dollar spent or 2.25%.

That’s decently better than most of the 2% cards.  Although I can’t be sure, I would think the extra 2500 points would count toward the companion pass.

If you didn’t get this offer, consider calling Chase or send them a secure message to see if you can get it.

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I recently had some miles that were going to expire with American Airlines.  I was looking for a way to extend them quickly and on the cheap.  Any mileage activity in the account would extend the expiration date.  Although there were many options, I wanted to test out Rewardsnetwork.  It’s a program that awards bonus miles or points for purchases at a qualifying restaurant.

Rewardsnetwork is currently available for many airline and hotel programs:

How does it work?

Essentially, you join the program in which you want to earn miles.  You can create an account for each of the above mentioned programs.  You then link a credit card to the account.  You can link one credit card to one account only. When you make a purchase at a qualifying restaurant, you will automatically be awarded bonus miles or points.  You can search for a participating restaurant on the appropriate website.

idine how it works

My experiment and how fast the miles posted.

I had about 20 days before my American Airlines miles expired.  I joined American Airlines dining program and linked a credit card.  I found a nearby restaurant, and just made a $2 drink purchase using my linked credit card.  Just 4 days after I made the purchase, I received email confirmation that I had received bonus miles.  When I checked my AAdvantage account, the miles were there in just 4 days and my mileage expiration date was extended.

AA dining miles

Overall, I think this is a very cheap and easy way to extend the expiration date of your miles, especially with companies like Spirit Airlines, that has a very short 3 month expiration policy.  Delta miles don’t expire.  United Airlines miles can be extended easily using the Mileage Plus X app.  I wouldn’t go out of my way to go to a restaurant for miles, but it’s always nice to see a surprise email saying you earned miles from eating out when you weren’t expecting it.

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Just recently, Fidelity introduced its Fidelity Rewards Signature Visa to replace the Fidelity Amex.  With that, they are severing ties with Bank of America.  All current cardholders of the Fidelity Visa will be converted to the Visa within about 6 months.

The Fidelity Amex is a Worldpoints earning card.  The best thing about that card, in my opinion, is that you can take points from the Bank of America Travel Rewards Visa card and combine them with the Fidelity Amex, and then cash out those points instead of having to use them strictly for a travel credit to get maximum value.

Some with Platinum Honors benefits with Bank of America earn 2.62 points per dollar (equal to 2.62% towards a travel redemption) on the BankAmericard Travel Rewards, which is why I called it the best card for everyday spending.  However, with the Fidelity Amex going away, that 2.62% will not longer be able to be cashed out.  Instead, the only way to fully redeem BankAmericard Travel Rewards at 2.62% would be to use them for travel credit.

Here’s where the Bank of America Worldpoints Business Visa come in.  Having one of these worldpoints earnings card would allow you to effectively replace the Fidelity Amex in the sense of being able to combine points and cashing them out (see below).

Bank of America Worldpoints Business Visa cards

  1. WorldPoints® Rewards for Business Visa® Card
    • No annual fee
    • Earn 2 rewards points per $1 on purchases at gas stations, restaurants, and office supply stores
    • Earn 1 rewards point per $1 on all other purchases
  2. WorldPoints® Travel Rewards for Business Visa® Card
    • No annual fee
    • Earn 1.5 rewards points per $1 spent on all purchases.
    • Earn 3 rewards points per $1 spent for travel booked through Bank of America’s Travel center.
    • No limit to the number of points you can earn and points don’t expire

Cashing out the 2.62% from BankAmericard Travel Rewards

Of course, all of this is only beneficial if you have Platinum Honors benefits with Bank of America.  Once you have one of these business visa cards, you should be able to combine points from BankAmericard Travel Rewards Visa to that account.  After that, you should be able to cash out the worldpoints.  Per Creditcardforum, to get the full value of the worldpoints, you must redeem 25000 worldpoints or more at a time.  If you redeem for anything less, you will not get 1 cent per point value out of them.worldpoints cash redemptions

Redeeming 25,000 points for a $470 economy roundtrip ticket.

With one of these business visas, you can use 25,000 points for a $470 roundtrip economy ticket.  That’s pretty amazing.  I learned about this from a pretty good guest post on Doctor of Credit.

worldpoints visa travel redemption

I’ve written about redeeming 25,000 Worldpoints for a $400 airfare ticket with the Fidelity Amex, but having a Worldpoints Visa even increases the value even more.

The restrictions on the ticket:

  • Twenty-one day advance booking and Saturday night stay required.
  • Stopovers of four hours or more aren’t allowed.
  • Tickets must be round trip on the same U.S. carrier approved by the Airline Reporting Corporation.

Here’s an example of how this all comes together for someone who is Platinum Honors with Bank of America earning 2.62% back on the BankAmericard Travel Rewards Visa.

Let’s say you spend $9600 on the BankAmericard Travel Rewards Visa.   As a result, you will earn 25152 travel rewards points.  Transfer them to the Worldpoints Visa.  Use 25,000 points and redeem for $250 cash or use those points for a $470 economy roundtrip ticket.  That’s pretty fantastic value for only $9600 spend.  In addition, this will be a revenue ticket, so you will be earning miles on this ticket.

If you look at the chart above, the business / first class tickets can be great value as well.

Keep in mind that you if you don’t have Platinum Honors with Bank of America, but instead Platinum only, you can still do well and earn 2.25% with the BankAmericard Travel Rewards Visa.

There you have it, 2 good reasons to have a worldpoints business visa.

Full disclosure: I don’t have a Worldpoints Business Visa.  I know that worldpoints can be combined, so I am assuming this will work.  I couldn’t test this out and there’s not much data out there regarding this.  If anyone has insight into this, please comment below.

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