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