It always feels odd that springtime and IRS share a season. The best of times, the worst of times?
Yes, it is tax time. For those who still owe taxes, is it a good idea to pay the balance with a credit card to earn some miles/points? The answer is – maybe.
IRS allows payment of taxes by debit or credit cards, sort of. They don’t accept payment directly from credit card companies but they do work with third-party vendors. There is a processing fee of about 2%, which varies depending on vendor.
Here’s an example: If you owe $3,000 in taxes, the balance needs to be paid by April 15 to avoid late payment penalties. Paying this by credit card will incur a fee of around 2%, or $60. Earning one mile or point per dollar means 3,000 points for $60, or two cents per point. Since there are many ways to pick up points for less, this is generally not a good idea unless you need to top off an account to complete some award level.
On the other hand, what if your credit card company offers double points? Now it is starting to look better and if your actual fee is less than 2%, this could be pretty good. Also, this may be a great deal if you do not have the cash at the moment to pay the taxes and this is the only way to avoid penalties or additional interest charges.
Using credit cards also should be considered if a recently acquired card includes a minimum spend sign-up bonus, or maybe these points are enough to earn an annual bonus level. Another time this might have value is where a credit card offers true 0% APR, meaning they will not assess any interest on charges for a certain period of time. Indeed, an interest-free loan can have more value than the points but in the best of situations, you receive both.
What would make this a bad idea? If you cannot pay your credit card balance in full at the next cycle due date. The credit card interest rate will substantially exceeds what IRS charges for late payments. Skip the points and work directly with IRS to make payments.
For state or local taxes, the rules for payments by credit card vary. Check with your own state online to see if this works for you.
Nothing here should be seen as tax advice. For that, please see your own CPA, tax attorney, or other tax advisor.