Ultimate guide to paying taxes by credit card, debit card, or gift card.

UPDATE: This post is out of date. Please click here for up-to-date coverage of paying taxes by credit card, debit card, or gift card.

If you have large estimated or year-end tax payments you’ve probably wondered if you could profit by paying your taxes with a rewards-earning credit or debit card.  The answer is unequivocally “yes”.  The trick is to make sure that the benefits you get outweigh the fees and hassle involved.  In my previous post, “The ultimate guide to paying taxes by credit card, debit card, or gift card. Part 1: Primer” I shared important background information.  In particular, I answered the following questions:

• What are the fees for paying by credit or debit card?  Quick answer: Click here.
• Are there limits to how many payments can be made? Quick answer: Yes, you are usually limited to 2 payments, but in Part 1 I offer some work-around tips.
• Will I be charged a cash advance fee?  Quick answer: No.
• Are the processing fees deductible?  Quick answer: Maybe.
• How can I view my tax payment history?  Quick answer:  Click here.

In this post, I’ll cover a number of different ways to pay taxes by credit card, debit card, or gift card. In each case, I’ll suggest the best ways to profit from these approaches.  Note that this series is specifically about paying US federal taxes.  Options for paying state and local taxes vary depending upon where you live.

Pay by credit card

At the time of this writing, fees for paying taxes via credit card are as low as 1.87%.  If you are able to itemize this expense, the effective cost to you will be even less.  There are three reasons that you may profit by using a credit card to pay taxes:

Credit card rewards greater than fee: If you have a credit card that earns rewards worth more than 1.87 cents per dollar (or whatever the current cost is minus the value of your deduction, if any), then you’ll come out ahead by paying taxes with this card.  This would include 2% cash back cards such as the Fidelity Investment Rewards card and point-earning cards such as the Barclaycard Arrival 2X card (which effectively earns 2.2% back towards travel).  And, for those who highly value airline miles, a card like the United MileagePlus Club card (which earns 1.5 miles per dollar) may make sense.

Signup bonus: Credit card companies routinely offer large bonuses for signing up for new cards, but usually require quite a bit of spend in a short time.  For example, at the time of this writing, there is a 100,000 mile offer for the Citi Executive AAdvantage MasterCard that requires $10,000 spend in three months. Depending upon your situation, paying taxes to meet that spend requirement may make sense.  You will earn both the standard 1 mile per dollar from the payment (or more if the credit card offers more than 1X for all purchases) plus you’ll earn the credit card signup bonus.  A full list of the best current signup bonuses can be found here: bestoffers.frequentmiler.net.

Big spend bonus: Many credit cards offer cardholders bonuses when they reach big spend thresholds.  For example, with the American Express Delta Reserve card, you’ll receive 15,000 bonus miles and 15,000 Medallion Qualifying Miles (towards elite status) when you reach $30,000 in annual spend (and again when you reach $60,000 in annual spend).  Similarly, some credit card companies offer short term incentives to increase spend.  They might target you, for example, with an offer of 15,000 bonus miles if you spend $10,000.  For a list of credit cards with standard big spend bonuses, please see: Best Big Spend Bonuses.

Pay by debit card

Currently, two of the payment processors offer a flat fee of $2.79 for personal debit card payments, and ValueTaxPayment.com currently offers a flat fee of $2.49 (except for MasterCard debit cards for which they currently charge $2.89).  Since prices change often, let’s simply assume that you’ll pay a flat fee of $3 per transaction.  As long as your tax payment is $160 or more, you’ll pay less in fees by paying with a debit card instead of a credit card.  The larger your tax payment, the smaller the debit card fee is as a percent of the total.  Unfortunately, very few debit cards today offer rewards for debit transactions, but there are a few.  Here are the debit cards that currently offer airline mile rewards that will most likely work with tax payments:

• Suntrust Delta Debit Card: Offers 1 mile per dollar spent.  $75 annual fee plus monthly fees unless you maintain a balance of $3K or more.  This debit card has a $35,000 transaction limit.  UPDATE: I have now heard from a few people who have said that recent tax payments made with this card have not resulted in miles earned.  This might not be a viable option anymore.
• UFB Direct Airline Miles Debit Card: Offers 1 American Airlines mile per every 2 dollars spent.  There is no annual fee, but there is a $1500 transaction limit.

I haven’t yet personally used either card to pay taxes, but multiple readers have informed me that tax payments with these cards have resulted in earned miles.

Pay by gift card: Visa or MasterCard

Visa and MasterCard gift cards are special in that they are also debit cards.  The best Visa/MC gift cards are usually those with the highest denominations because the purchase fee, then, will be smaller as a percent of total value.  The largest denomination Visa and MasterCard gift cards commonly found today are $500.  Fees for $500 Visa and MasterCard gift cards are usually around 1%.  You can use these cards as debit cards to pay taxes online or by phone.  You will be charged a separate payment transaction fee for every debit card you use.  If you want to use more than two cards to pay taxes, please see my prior post “The ultimate guide to paying taxes by credit card, debit card, or gift card. Part 1: Primer” for details of how that might be achieved.

In most cases, your total fees (for buying gift cards and paying taxes) will come to around 1.6%.  While this is lower than the best current fees offered for credit card payments, it is not dramatically lower.  So, I’d only recommend using Visa or MasterCard gift cards for tax payments if you have found a way to buy them with very low fees or no fees, or if you buy them at a merchant in which your credit card earns a category bonus.  For example, if you have a credit card that earns 5% cash back at drugstores and you buy OneVanilla Visa cards with a 1% fee, then you have already profited by 4%, so the additional .6% fee for paying taxes in that case may be worth the cost.  That said, there are other ways to use Visa and MasterCard gift cards that may be both easier and less expensive.  For example, some stores will let you use debit cards to pay bills and/or buy money orders.  And, at Walmart you can use debit cards to reload American Express Bluebird cards for free.  The easiest option, in my opinion, is to pay bills online with Evolve Money (see “Pay bills online with debit and prepaid cards”).

Pay by gift card: American Express

Unlike Visa and MasterCard gift cards, American Express gift cards are not debit cards.  So, if you use an American Express gift card to pay taxes, you will have to pay the credit card processing fee.  On the other hand, it is currently possible to get American Express gift cards with values up to $3000.  And, it is often possible to earn extra airline miles or cash back by buying Amex gift cards through online shopping portals.  At the time of this writing, for example, it is possible to get up to 4 points per dollar or 3% cash back (see this Quick Deal).  For complete details on the ins and outs of buying Amex gift cards please see “Everything you ever wanted to know about Amex gift cards”.  Its very important to read that post since some credit cards will charge a cash advance fee when used to buy Amex gift cards online.  If you are hit with such a fee, the rewards earned from the portal won’t be worth it.  As long as you use a safe credit card, though, you will earn both credit card rewards and portal rewards.  The value of these rewards, in combination, can often far exceed tax processing fees.

The trickiest part of paying with Amex gift cards is figuring out the maximum payment you can make.  Let’s say, for example, that you have a $3000 Amex gift card and you want to use the whole thing for your tax payment.  You can’t make a $3000 payment since the fees will push the total charge above $3000 and the charge will be declined.  Instead, here is a formula to use:

Tax Payment = GiftCardAmount / (1 + per dollar fee)

For example, suppose you have a $3000 gift card and that the current credit card fee is 1.87%.  In that case, the per dollar fee is .0187 and the formula works out as follows:

Tax Payment = $3000 / (1 + .0187)

Tax Payment = $3000 / 1.0187

Tax Payment = $2944.93

Due to rounding, you may have to alter the result by a penny one way or another, but the above formula should get you most of the way there.

Summary

Above, I presented four options for paying federal taxes and earning rewards in the process.  The easiest options are to pay outright with rewards earning credit cards.  The most rewarding option, though, is to use a rewards earning credit card to buy Amex gift cards through a rewards portal and then use those Amex gift cards to pay taxes.  This can be a frustrating experience, though, and may be extremely difficult if you have very large tax payments to make.  I don’t recommend using Visa or MasterCard gift cards to pay taxes because there are better and easier ways to spend down those cards.

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