UPDATE: This post is out of date.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.
Is it worth paying taxes by credit card if you pick the right card to use? Do credit card perks make up for the fees associated with paying taxes via credit card?
In recent posts, I showed how you can use federal tax payments to essentially buy points and miles (and even cash). Please see:
- Buying miles and points from the IRS: debit cards
- Buying miles and points and cash from the IRS with credit cards
In those posts I concluded the following:
- Using a debit card that offers miles for debit purchases can be a great deal.
- You can earn a profit by paying with a 2% cash back (or better) credit card
- Using a points or miles earning credit card can be an inexpensive way to buy points or miles, but you should be sure that you’ll use the points or miles for high value redemptions before you invest in them.
Points and perks
Where things get a bit more interesting with credit cards is where they offer perks for high spend. Paying taxes with a credit card can be a great way to reach high spend thresholds, so its worth considering whether the fees are worth spending to get not just points and miles, but special perks as well.
Best cards for earning perks from spend
A number of credit cards offer perks when you spend above some threshold each calendar year. Here are some of the best options:
- Citi Hilton HHonors Reserve. Earn 1 free weekend night with $10K spend. Earn Hilton Diamond status with $40K spend. Earn 3X points for everyday spend. $95 annual fee.
American Express Delta Reserve. Earn 15K bonus miles and 15K elite qualifying miles (MQMs) with $30K spend, and again at $60K spend. $450 annual fee.Update: This offer has expired and/or is not currently available at Frequent Miler. American Express Platinum Delta Skymiles. Earn 10K bonus miles and 10K elite qualifying miles (MQMs) with $25K spend, and again at $50K spend. $150 annual fee.(Update: This offer has temporarily expired.)
- Chase British Airways. Earn one travel together ticket good for two years after $30K spend. Earn 1.25X Avios for everyday spend. $95 annual fee.
- Chase Southwest Airlines Rapid Rewards. Earn 110,000 points in a calendar year and receive a companion pass good for unlimited flights for the rest of that year and all of the next year. This is a feature of the Southwest program not specifically tied to the credit card, but points earned from the credit card do count. $69 or $99 annual fee, depending on whether you have the Plus or Premier version of the card.
- Bank of America Virgin Atlantic. Earn half off a companion award ticket with $25K spend. Earn 15 tier points (Silver status) with $37,500 spend. Earn 40 tier points (Gold status) with $100K spend (UPDATE: the credit card only allows earning 2 tier points per month). 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.
Other cards with big spend perks, but not covered here include: 1) Starwood American Express: earn Gold status with $30K spend; 2) Hilton HHonors Amex: Earn Gold status with $20K spend; 3) Hilton HHonors Surpass: Earn Gold status with $20K spend, or earn Diamond status with $40K spend; 4) Chase Fairmont Visa: Earn a free night with $12K spend; and 5) Marriott Rewards Visa: Earn 1 elite credit for every $3000 spent.
For each of the cards listed above, I’ve calculated the cost to earn big-spend perks entirely through IRS payments:
Annual Fee + Tax Fee
Cost per point (not counting perks earned)
|Hilton HHonors Reserve||1 free weekend night at $10K spend||$95 + $188 = $283||30K||.94 cents / .6 cents|
|Hilton HHonors Reserve||Diamond status at $40K spend||$95 + $752 = $847||120K||.71 cents / .6 cents|
Update: This offer has expired and/or is not currently available at Frequent Miler.
(Update: This offer has temporarily expired.)
(Update: This offer has temporarily expired.)
|British Airways||Travel together ticket at $30K spend||$95 + $564 = $659||37.5K||1.8 cents / 1.5 cents|
|Southwest||Companion pass good for unlimited flights up to two years at $110K spend||$69 + $2068 = $2137||110K||1.9 cents / 1.9 cents|
|Virgin Atlantic||Half off companion award at $25K||$90 + $472.50 = $562.50||52.5K||.9 cents / .8 cents|
|Virgin Atlantic||Silver status at $37.5K||$90 + $708.75 = $798.75||71.25K||1.1 cents / 1 cent|
|Virgin Atlantic||Gold status at $100K||$90 + $1890 = $1980||172.5K||1.1 cents / 1.1 cents
(UPDATE: this credit card only allows earning 2 tier points per month, so you cannot get to Gold with credit card spend alone)
The rightmost column, above, shows the cost per point if using tax payments to buy points. This calculation does not factor in the value of perks (or elite qualifying miles) earned. Two numbers are shown here because the first includes the credit card’s annual fee in the calculation and the second does not. 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. In fact, some of these cards have automatic perks that alone justify the annual fee. For example,
the Delta Reserve card gives you an annual companion pass, unlimited SkyClub access for you and up to two guests when flying Delta, free checked bags, and priority elite upgrades. These perks alone may be worth $450 per year to you if you fly Delta often. Update: This offer has expired and/or is not currently available at Frequent Miler.
Lets look at each credit card to see how good of a deal each one is to use tax payments to buy perks and points…
- Citi Hilton HHonors Reserve. This card is worth the $95 annual fee to many people because it automatically confers Hilton Gold status which gives you free breakfast, free internet, and occasional room upgrades at Hilton properties. To get a free weekend night each year via $10K of tax payments, you would have to pay $188 in tax fees. Along the way, you would also earn 30,000 Hilton HHonors points. Is it worth it? I’d say yes as long as you’re sure to use the weekend night at a high priced hotel. With 30,000 points you could stay a night in a mid-tier property (category 4 or 5) that would most likely otherwise cost more than $100 per night. And, with the free weekend night you could stay in almost any property including those that would normally cost $500 or more per night. That’s a pretty good deal for $188 all-in. To get to Diamond status, though, you would have to spend an additional $30K on the card, which would cost an additional $564. Is it worth $564 to get Diamond status and an additional 90K points? With Diamond status you are guaranteed lounge access and your upgrade chances are better than with Gold status. And, the extra 90K points could be used for one or two nights at a top tier property, or three nights at a mid tier property. It might pay for itself, but it might not. Personally I wouldn’t do it. Recommendation: Spend $10K to get a free night. Don’t spend $40K for Diamond status unless you stay often at Hilton properties and top tier status is very meaningful to you.
American Express Delta Reserve. As I explained earlier, this card’s $450 annual fee is almost worth paying just for the automatic perks this card offers: SkyClub lounge access, free companion pass, free checked bags, priority boarding, and priority elite upgrades. To get the most from this card, spend exactly $30K or exactly $60K per year on the card so that every dollar spent receives 1.5 redeemable miles and .5 MQMs (Medallion Qualifying Miles). $60K of IRS spend will cost you $1,134. In exchange, you’ll get 90,000 redeemable miles (almost enough for a saver-level business class round trip flight to Europe) and 30,000 MQMs which is enough to get you to Silver elite status or well on your way to higher level status if you earn MQMs through flying or other means. Recommendation: Go for it if you are a frequent Delta flyer and you highly value elite status, club access, etc. If you don’t fly Delta often, then forget about it.Update: This offer has expired and/or is not currently available at Frequent Miler. American Express Platinum Delta SkyMiles. This $150 card easily pays for itself each year with its annual companion pass (as long as you use it!), free checked bags, and priority boarding. By paying $50K towards taxes with this card, you’ll incur $945 in fees, but you’ll earn 70,000 redeemable miles and 20,000 MQMs. Since the Delta Reserve and Platinum cards are each available as either personal or business cards, it is possible for a person to have one of each. For example, I have a personal Delta Reserve card and a business Delta Platinum card. By maximizing spend on both cards, I earn 50K MQMs each year which is enough to earn Gold status without flying.(Update: This offer has temporarily expired.) Recommendation: Same answer as the Reserve card. Go for it if you are a frequent Delta flyer and you highly value elite status. If you don’t fly Delta often, then forget about it.
- Chase British Airways. This $95 annual fee card automatically awards 1.25 points (Avios) per dollar spent. At $30K of spend, you’ll get a Travel Together ticket that is valid for two years, and 37,500 Avios points. The cost for the card and the fees for paying taxes would total $659. The Travel Together ticket allows you to book two award flights for the cost (in points) of one ticket. The catch is that you must fly British Airways itself (as opposed to partners) and you must pay taxes and fees for both people. As a result of these conditions, using the travel together ticket is often a really bad deal. See this post for more information. Recommendation: Don’t bother unless you fully understand the downsides of the Travel Together ticket and still see value in it.
- Chase Southwest Airlines Rapid Rewards. Southwest will give you a Companion Pass after earning 110,000 points in a calendar year. To do so through IRS spend would cost $2137 (and would require very large tax bills!). The Companion Pass is good for unlimited paid or award flights for the rest of the year in which you earned 110K points plus all of the next year. Obviously, if you fly Southwest Airlines with a partner often, this pass is worth a lot! Also keep in mind that you will earn 110,000 Southwest RapidRewards points as well. Those points alone are worth about $2000 towards “Wanna Getaway” fares even without the companion pass (see “More value from Southwest points“). So, on the surface this seems like a great deal, but keep in mind that there are cheaper ways to earn a companion pass (such as signing up for two Southwest credit cards that each have 50K bonus points). Recommendation: If you fly Southwest often with a partner (or want to) and you have huge tax bills and no other way to earn a companion pass, then this is a great way to get one!
- Bank of America Virgin Atlantic. I find this card interesting not for its perks, but for the ability to earn huge numbers of points through spend. The card automatically gives 1.5 miles per dollar spent and then also gives bonus miles when you hit various spend thresholds. Thanks to Virgin Atlantic’s partnership with Delta, it may be worthwhile to earn elite status through spend in order to gain some benefits when flying Delta. Otherwise, I think you would have to be a regular Virgin Atlantic flier to get much out of Silver or Gold status. Plus, since the credit card only allows you to earn 2 tier points per month (and 15 points are required for Silver status), you would have to spread out 8 payments accordingly. Sounds like a pain. Also, the half off companion award is only mildly interesting. It will let you book a companion, in coach only, for half the miles required for the primary passenger. Full taxes and fees still apply. Recommendation: If you can make good use of Virgin Atlantic miles, then spend $25K on the card to get the full assortment of bonus miles (and the half-off companion award), but don’t bother going for Silver or Gold status.
It’s very important to note that the costs shown in the table above assume that 100% of the required spend is accomplished by paying federal taxes. It does not take into account the fact that you can probably knock off a lot of the spend by simply using the card day to day. If you are close to reaching a big-spend threshold through ordinary spend, then the cost to make up the difference via tax payments would be much smaller than shown above.
Another thing to note is that some people have made an art of meeting big spend thresholds through purchases of gift cards and/or reload cards (see “The reload game is on“). That can be much cheaper than paying taxes, but it is also much more complicated and time consuming. The analysis here focuses on the opportunity to reach big spend thresholds quickly and easily through federal tax payments.
Using credit cards like those listed above to pay federal taxes can be a great way to earn valuable perks such as elite status, free hotel nights, or companion passes. All of these potential perks have one thing in common: they are worth nothing unless you use them. None of the cards offer perks so compelling that I would recommend them to everyone. Instead, I would recommend the Hilton card to those who stay often at Hilton hotels. And, I would recommend the Delta cards to those who fly Delta often. And so on.
What do you think? Would you use federal tax payments to earn big spend perks?
[…] http://boardingarea.com/frequentmile…-credit-cards/ I find this post useful this time of year. […]
It’s worth including the United Club card (1.5 miles per $), the Amex PRG (1.5 pts per $ if you spend exactly $30k), and the United Explorer (1.4 miles/$ if you spend exactly $25k. These will be among the most attractive on your list on a Net Value Added per dollar spent. Net Value Added is (number of points per dollar spent) x (value per point) – fees. This makes better sense than using the Cost Per Point metric, which I also used to use. The problem with Cost per point is that 0.6 per hilton point is not as good as 1.25 per united mile. It is logically sound to ignore the annual fees if you already have these cards.
ON a Net Value Added basis, it is tough to be the Delta Skymiles debit card, the grandfathered 4% Travelocity Amex, and the Old Ink Bold with Exclusives that gets 1.675 UR points per $ up to the first $100k spent per year.
bluto: I included all of those cards in my previous post: Buying miles and points and cash from the IRS with credit cards. I agree with you that value per dollar would be better, but most points & miles are impossible to value at a fixed rate. Please see: Impossible point valuations and the joy of free. So, I’m leaving it to the reader to decide how much they value each type of point.
@PointsObsession- you missed a golden opportunity! You just needed to buy 8,500 $200 GCs at Staples and unleash them on an unsuspecting CSR 🙂 My situation is different as it’s all earned income and so I just pay it in withholdings, and yours was probably cap gains. What made you use a CC on a bill like that?
I had a very large tax bill to pay last year, ($1.7million),
and called several credit card companies to see if any would allow me to prepay. Barclays: No; Chase: No; American Express: No; Citi: Yes
1) Virgin Atlantic Card only allows earning of 2 tier points per month, and 24 tier points per year. We cannot get to Gold (40 tier points) by credit cards alone.
2) There were reports on FlyerTalk that IRS just simply confiscated people’s overpayment.
1) Thanks, I didn’t realize that. I appreciate the correction! I’ll update the post ASAP.
2) The premise here is that using a credit card may make sense for those with very large tax payments. I wasn’t advocating overpaying taxes. On the other hand, I find it very difficult to believe that the IRS would confiscate overpayments unless you owed them for prior years.
How does the 15K bonus after 30K spend on Gold Amex stack up?
THEsocalledfan: I covered the Gold card in my previous post about earning points. I see the 15K bonus as point earnings, not perk earnings. Anyway, 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 not bad, but you can often do better.
There’s also the issue of getting the card companies to let you spend $20-$110k on these personal credit cards.
ff – I can’t speak for anyone else, but my federal income tax is typically around $150K/yr. These analyses are extremely invaluable to me, and those in similar circumstances. Yes, these tax bills are less common, but the advice on how to pay them is virtually non-existent. Thanks FM for your very helpful analysis.
stevento: I’m glad this helps!
Sal: While I haven’t tried this yet, my understanding is that most credit card companies will let you prepay and therefore increase your limit enough to cover very large payments. It would be a good idea to call the bank first to let them know what you’re up to.
This analysis of cost is great, but fails to take opportunity cost into account.
If, as you point out, you can get some cash back from paying taxes, then the true cost of the scheme is not just money spent, but money lost as well by not getting the cash back.
So I assume it is 2% cost for spending 1$ and the numbers go up slightly, but not by much (2% instead of 1.89%) that is about 5-6% extra.
No one (or hardly anyone) has a few hundred thousand to do all this daily for all cards. If you overpay, you have the risk of the money being tied up for weeks or months and you lose interest in the money with the IRS. So it is money you owe them that is usually paid and 90% of the country earns less than 100k per year and pays less than 15k in taxes
The real message is that you can goose your elite status and target the benefits you want, and if you use the taxes to hit specific goals, you can get real measurable value out of the money used for tax payments that you would have to pay anyway for a small fee..
ff: You’re right that opportunity cost should be factored in, but it does make these analyses much more complicated (to explain). I’ve been thinking a lot about opportunity cost and will post my thoughts on it soon.