The start of the new year means it is time to start thinking about taxes for 2021. And while there’s not much joy in paying a big tax bill, there’s a way to potentially get something good out of it if you owe money to the IRS: Pay your taxes with a credit card.
There’s no one-size-fits-all answer to handling your taxes. And data suggests that an overwhelming majority of people pay federal income tax bills using cash. That may be the right choice for many. But in the right circumstances, paying taxes with a credit card can be a boon for your stash of points and miles.
We’ll run through the basics of paying your tax bills with a credit card, and when it might make the most sense to do so.
How to Pay Your Taxes with a Credit Card
Will I Have to Pay a Service Fee?
Let’s get this out of the way first: Paying taxes with a credit card isn’t free. But it can easily be worth it if you play your cards right.
Processing fees for paying your taxes with a credit card will vary by service provider. Per the IRS website, the current best deal for this service is offered by Pay1040.com, which offers a 1.87% processing fee (for a minimum of $2.50) when you pay taxes with a credit card.
Compare that to a 1.98% or 1.96% fee when using services like acipayonline.com or payUSAtax.com. While a 0.09% savings by using Pay1040.com might not sound like a big deal, it can make a difference if you owe a decent amount of money come tax season.
And since all three services accept major credit cards from Visa, American Express, Discover, MasterCard, etc. Pay1040.com should be your choice as the fees are simply the lowest.
This changes from year to year, so you will always want to check the IRS website to see who’s fees are the lowest. And considering the fees you will find to pay with a credit card for other transactions, paying less than 2% on your tax bill is a pretty solid deal, all things considered.
When Should You Pay Taxes with a Credit Card?
If you owe the IRS money come tax time, there are some worthwhile opportunities to get a good return on your payment – even with paying the 1.87% processing fee.
And the absolute best way to do it is by putting your tax bill on a brand new credit card to earn a big welcome offer bonus. It’s one of the easiest ways to hit the minimum spend requirement on a new credit card, depending on the size of your tax bill. Charge it to your new card, then pay it off immediately with the money you have saved up to cover your tax burden.
For example, the brand new Capital One Venture X Rewards Credit Card is out with a limited-time offer to earn 100,000 Capital One Venture Miles after you spend $10,000 on your card in the first six months of card membership. On top of that, you’ll receive a $200 credit to use towards home share properties on the likes of either Airbnb or VRBO.
Being that the card earns 2x miles on every dollar you spend, you’ll end up with 120,000 miles after completing the $10,000 spending requirement. The card has a $395 annual fee, which you’ll also need to consider.
But that sign-up bonus is worth at least $1,200 towards travel, and it’s potentially worth much, much more by utilizing some of Capital One’s transfer partners.
So let’s say you have an upcoming tax bill of $5,000. Using Pay1040.com you would incur a fee of $93.50 ($5,000 x 1.87% processing fee) to use your card. After crunching the numbers on the sign-up bonus on the Venture X card, you would still be coming out ahead by at least $700 after paying the processing fee, and the card’s $395 annual fee.
And a $5,000 tax bill would knock out half of the card’s $10,000 spending required to earn the big bonus.
That’s a great deal – especially if meeting the $10,000 spending requirement in six months would otherwise be a stretch.
Click Here to learn more about the Capital One Venture X Rewards Credit Card.
You can also pay part of your taxes with a credit card and the rest with cash. That means you can put just enough to meet a minimum spending requirement on your credit card and pay the rest with cash without paying a fee.
And by and large, if you can be financially responsible with a new line of credit, paying your taxes with a credit card makes the most sense when you are working towards a minimum spending requirement on a new credit card. It will simply give you the best return on your spending and help justify paying a 1.87% fee to pay your taxes.
Make sure to check out our Top Credit Cards Page to see the best current offers.
When You Shouldn’t Use A Credit Card to Pay Taxes
We love points and miles, but it won’t always make sense to use a credit card to pay taxes.
For example, if you carry a balance on your credit card, the interest you’ll pay will vastly outweigh the value of any credit card rewards you’d earn. We do not recommend paying your taxes with a credit card in this situation. If you can’t pay off the balance immediately, skip the credit card.
But beyond that, it generally won’t make sense to use a credit card to pay taxes if you aren’t working towards a minimum spending requirement for a new credit card account. Credit cards simply don’t offer enough points when paying your taxes to make it worth the fee unless it’s earning you a big signup bonus.
It’s one thing to earn 50,000 points or more by putting your tax bill on a credit card. But if you’re just earning 1 or 2 points per dollar by paying with your credit card, you’re better off paying with cash. The fees associated with using the credit card will likely outweigh the points you’ll earn. There are exceptions to this of course, but by and large, it is a good rule of thumb.
So if you’re not working on unlocking that points bonus, or you are not sure if you can immediately pay off the credit card balance after charging your tax bill, it’s not worth it to pay taxes with a credit card.
Can You Pay State Taxes with a Credit Card?
In addition to paying your federal tax bill with a credit card, most states that collect state income tax will also allow you to pay your state tax bill using a credit card. However, the payment processors will vary by state, and by and large, the fee will be higher than what you pay for your federal tax return.
For example, in my home state of Minnesota, the cheapest option is through a provider called payMNtax. The convenience fee is 2.25%. And again, this may or may not make sense based on your personal financial situation. But if you are not charging this on a new credit card to meet a minimum spending requirement, I would suggest skipping the credit card for your state tax bill.
But since this will be handled separately from your federal tax payment, you may be able to earn another sign-up bonus on a different card if your state tax bill is large enough.
MasterCard has an excellent resource on its website detailing the best service providers for paying your state tax bill with a credit card in each state.
Paying taxes with a credit card can be a great way to meet a minimum spending requirement for a new credit card account. But if you’re not earning a sign-up bonus for your spending, it’s likely not worth it.
Federal taxes are due Monday, April 18, so you have plenty of time to strategize and think about your tax bill. With some luck, you can earn a big stash of points while paying Uncle Sam.