Buying miles and points and cash from the IRS with credit cards

UPDATE: This post is out of date.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.

UPDATE: The Barclaycard offer referenced below is no longer available. Click here to find updated offers.

Yesterday I showed how to earn miles by paying taxes via debit cards (see “Buying miles and points from the IRS: debit cards“).  Today we’ll take a look at rewards credit cards.

If you have very 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.  Here is a chart (provided by the IRS) that shows the fees associated with paying taxes via credit or debit card.  The fees shown below are subject to change, so please see this web page for the latest rates.

Visa and MasterCard tax payment fees are only 1.88% at ChoicePay.com, whereas American Express and Discover fees are only slightly more expensive at 1.89% via PayUSAtax.com.  Still, those fees can add up fast.  Take a $10,000 tax payment, for example.  A 1.88% fee on a $10K payment would be $188.  Depending upon which credit card you use, the fee may or may not be worth it.

Regular 1X cards

Most miles & points earning cards earn only mile or point per dollar spent.  By using one of these cards to pay your taxes, you would be buying points at a rate of 1.88 cents each (or 1.89 cents each with Amex or Discover).  That’s not too bad for high value points, but its more than I would usually want to pay.  Some cards, though, offer better than 1X returns.  To find the best of these, let’s look at some of the credit cards listed in these posts:

• Best rewards for everyday spend
• Best Big Spend Bonuses

Best everyday spend cards for getting cash back

• JCB’s Marukai card for Hawaii and California residents.  This card has a tiered rewards structure where, within a calendar year, you’ll earn 1% cash back for the first $1K spent, 2% cash back for the next $1K spent, and 3% cash back thereafter.  Annual fees sum to only $25 per year.

UPDATE: According to this FlyerTalk thread, the JCB Marukai card is not a standard Visa/MasterCard/Amex, but rather its own type of card that should work like a Discover card.  Unfortunately, some have reported problems with trying to use this card for tax payments.  Hat Tip: Gagne.

• Barclaycard Arrival World MasterCard – $89 Annual Fee Card.
  (OFFER NO LONGER AVAILABLE. CLICK HERE TO FIND UPDATED OFFERS)
  Earn 2 points per dollar everywhere and get a 10% rebate on points used for travel.
• Fidelity Investment Rewards Amex.  2% cash back.  No annual fee.

Above are some of the best cash back cards that earn more cash back per dollar spent than the cost to pay taxes.  Factoring in the annual fees, we can calculate profit earned for various annual tax payments.  For example, if we annually spend $40,000 in taxes on the Barclaycard Arrival card, we would pay the $89 annual fee plus $752 in tax fees, for a total of $841.  In exchange, we would earn 80,000 points worth $800 in regular expenses or $880 in travel (thanks to the 10% rebate when using points for travel expenses).  The profit, then would be $39 if used towards travel.

Let’s look at a few scenarios with the top cards:

As you can see above, the JCB Marukai is the best cash back card to use if you have large tax payments (and live in California or Hawaii).  For smaller tax payments, the no annual fee Fidelity card comes out ahead, but will hardly make you rich.

The math on the Barclaycard Arrival card doesn’t look too good, but keep in mind that most of that is due to the card’s annual fee.  If you’re on your first year (with the first year annual fee waived) or if you’re paying the annual fee on the card for other purposes, then you’ll make a profit using this card for tax payments.  Let’s look at the same chart with annual fees excluded:

You still won’t get rich when not counting the annual fees, but at least you would make a small profit with any one of these cards.

Best cards for earning points & miles

To find the best point earning credit cards for tax payments, its necessary to look at cards that earn more than 1X for all spend, and cards that earn bonus points for large spend.  Here are some of the best options:

• Chase United MileagePlus Club card.  Earn 1.5 miles per dollar for all spend.  $395 annual fee.
• Chase British Airways Visa card.   Earn 1.25 Avios per dollar for all spend.  $95 annual fee.
• Bank of America Virgin Atlantic card.  Earn 1.5 miles per dollar for all purchases plus 7,500 bonus points when you reach $15K annual spend and 15,000 7,500 bonus points when you reach $25K annual spend.  $90 annual fee.
• American Express Premier Rewards Gold (PRG) card.  Earn 1 point per dollar plus 15,000 bonus points when you reach $30K of annual spend.  $175 annual fee.
• Chase United MileagePlus Explorer card.  Earn 1 point per dollar plus 10,000 bonus points when you reach $25K of annual spend.  $95 annual fee.
• Chase Freedom card.  Earn 1 point per dollar plus a 10% annual bonus on all points earned.  No annual fee.

As you can see above, the annual fees for most of these cards make them a bad deal for paying taxes unless your tax payments are very high.  Even with high tax payments, its hard to do better than the no fee Freedom card which allows you to buy Ultimate Rewards points for 1.7 cents each.  Of course, the only way Freedom points can be worth much more than a penny each is if you can transfer the points to airline or hotel programs, and the only way to do that is to also have a premium card such as the Sapphire Preferred, Ink Bold, or Ink Plus cards.  So, the Freedom card is not really as great of an option as it seems.

With the cards that earn bonus points for high spend, you can do slightly better than depicted above by spending exactly the amount required for the bonus points and no more.  For example, if you pay exactly $30K in taxes with the Amex PRG card, you will get the 15K bonus points, and the math will work out as follows: ($175 + $567) / (30K+15K) points = 1.6 cents per point.  That’s a slightly better price per point than you would get if you spent $40K.

In many cases, you may have one or more of the above cards for reasons other than paying taxes.  If you have one of these cards anyway, then it doesn’t make sense to factor in the annual fee for these calculations.  Let’s look at the same cards again without the annual fees:

As you can see above, by removing annual fees from the calculations, the price per point comes down quit a bit, especially for smaller tax payments.  To get an idea of whether these are good prices, take a look at my Fair Trading Prices page.  More importantly, though, you should know how you plan to spend points or miles before paying for them in this way.  If you know, for example, that you’ll be able to save 3 cents per mile used when booking travel, then buying miles for less than 2 cents each might make sense.

Virgin Atlantic Example

The Virgin Atlantic card offers the best earning rate of the cards shown above.  So, is it worth buying Virgin Atlantic points in this way?  Let’s say you’re planning a trip to London from Chicago and you’re able to find coach fares for about $1000 round trip.  Let’s see how much it would cost to use Virgin Atlantic miles instead, assuming you bought those miles for 1 cent each:

Virgin Atlantic Award flight cost for Chicago to London, round trip:

• 35,000 miles
• $442 taxes and fees

Assuming you bought miles at 1 cent each, then the total cost would be: $350 (in miles) + $442 (in taxes and fees) = $792.  That’s about a 20% savings from the fictional $1000 alternative, but its hardly worth the trouble especially considering the fact that award seats may be harder to find than discount paid fares.

Tax Deduction

I’m no accountant, but it is my understanding that tax payment processing fees are legitimate deductible expenses.  Depending upon your specific tax situation, this could mean a substantial reduction in your overall costs.

Analysis

As you can see in the tables above, it is possible to use IRS payments to buy points in various programs for less than 2 cents per points.  As I showed in the Virgin Atlantic example, though, buying points might not save you a lot of money.

An alternative to buying points is to earn cash back instead.  If you have very large tax payments, you could potentially earn hundreds of dollars by paying your taxes this way.

Not shown above are credit cards that offer perks for large spend.  Examples include the Hilton Reserve card that offers a free weekend night after $10K spend or the Delta Reserve card that offers 15,000 elite qualifying miles (AKA Medallion Qualifying Miles, AKA MQMs) after $30K spend and again at $60K spend.  I’ll follow up soon with an analysis of perks that can be earned by paying taxes via credit card.

Conclusion

It makes sense to pay taxes with a 2% (or better) cash back card. In most cases, though, it doesn’t make sense to use a point-earning credit card unless you earn significant benefits in addition to the points earned.  I will follow up soon with details about options for earning perks, and later with other options for paying taxes (e.g. prepaid cards).

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