Pay your taxes with a credit card to earn rewards

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As 2021 begins, taxpayers will start preparing for tax season. In the midst of gathering receipts and setting up virtual appointments with your accountant, consider how you might pay Uncle Sam in the event you owe money.

One way to ease the financial blow is to use a credit card and collect valuable rewards. But you’ll have to be smart about using this strategy, as there’s a fee for paying your taxes with plastic.

There are three official IRS processors to choose from, all of which charge different fees. You’ll want to choose the processor with the lowest fee, PayUSAtax at this writing, but be sure to check before you sign up.

PayUSAtax charges credit card users 1.96 percent of the total balance, with a minimum fee of $2.69. In some cases, the processing fees themselves can be tax write-offs.

Who could benefit when they pay taxes with a credit card?

This strategy isn’t for everybody. If you don’t have the cash on hand to pay your tax bill now, you may be better off setting up an installment agreement with the IRS. If you think paying by credit card might benefit you, you should:

  • Have good to excellent credit. You’ll need this to qualify for a top rewards card that offers a bonus and will pay you cash back when you use the credit card to pay your taxes.
  • Pick a card with no annual fee. Cards that charge an annual fee may offer bigger rewards or perks, but this strategy is far less complicated to manage if you take cards that charge a fee off the table. We’ll take a look below at some example scenarios of how much you can earn depending on what you owe and the card you choose. These scenarios assume you pick the cheapest processor when filing your return.
  • Do the math. Make sure the benefits of using a credit card outweigh the processing fee.
  • Pay off the balance when it’s due. This rule of thumb is always good to follow, but if you don’t have the money tucked away in a savings account, there are a number of rewards cards that offer a 0 percent introductory APR. This is akin to having an interest-free loan—that also rewards you for spending.

What you owe makes a difference

For people who are already shopping around for a new rewards card, this could be a good way to meet minimum spending requirements. Since you have to pay taxes anyway, you might as well enjoy some benefits.

What you’ll pay in fees
Tax bill Processing fee
$5,000 $93.50
$4,000 $74.80
$3,000 $56.10
$2,000 $37.40
$1,000 $18.70

If you used a credit card you already own that pays 2 percent cash back to pay off a $4,000 tax bill, you’d earn $5.20 after accounting for the processing fee. That’s why opening a new card to pay the bill may be more worthy in pursuing this strategy. Here are examples of bonuses that are worth more than the fees.

If you owe more than $4,000

Chase Sapphire Preferred® Card

Fees

  • Annual fee is $95
  • No foreign transaction fees
  • Variable APR: 15.99 percent to 22.99 percent

Advantages

  • Receive 100,000 bonus points after you spend $4,000 in the first three months.
  • Earn 2x points on dining (including eligible delivery services) and travel and 1x points on everything else
  • Earn 5x points on Lyft rides (through March 2022) and 10X points on up to $500 of takeout orders and prepaid reservations via Chase Dining in the Ultimate Rewards portal through Jun. 30, 2021.

What you’d earn

If you have over $4,000 to pay in taxes, you’ll get 100,000 bonus points in the first 3 months from account opening. Points are worth 1 cent, although that increases to 1.25 cents if redeemed for travel via the Chase Ultimate Rewards portal. That’s $1,250 worth of travel before even factoring in your regular rewards earning potential.

Similar to the Capital One Venture Rewards card, the Sapphire Preferred is better for those who aren’t spending a lot on travel but want their regular dining out (or food delivery) to help them earn points toward future travel.

If you owe $3,000

Capital One Venture Rewards Credit Card

Fees

  • Annual fee is $95
  • No foreign transaction fee
  • Variable APR: 17.24 percent to 24.49 percent

Advantages

  • Enjoy a one-time bonus of 60,000 miles once you spend $3,000 on purchases within 3 months from account opening, equal to $600 in travel
  • Unlimited travel rewards at 2 miles-per-dollar never expire. Every 100 miles can be redeemed for $1 worth of rewards.
  • Travel rewards are flexible, never expire and can be redeemed at any airline, hotel or rental car.
  • Rewards can be redeemed on discount travel sites.
  • There are no foreign transaction fees—a must for any good travel card.

What you’d earn

Folks who like to travel and owe more than $3,000 can earn 60,000 bonus miles when you spend $3,000 on purchases in the first 3 months from account opening.

Capital One Savor Cash Rewards Credit Card

Fees

  • Annual fee is $95
  • No foreign transaction fees
  • Variable APR: 15.99 percent to 24.99 percent

Advantages

  • Earn a one-time $300 cash bonus once you spend $3,000 on purchases within 3 months from account opening.
  • This card offers an unlimited 8 percent cash back on purchases from Vivid Seats (until January 31, 2022), 4 percent on dining and entertainment, 2 percent at grocery stores and 1 percent on all other purchases.

What you’d earn

Foodies and people who like to dine out – and also happen to owe around $3,000 in taxes, would benefit from the Capital One Savor Cash Rewards credit card. The annual fee is $95. You’ll also get a $300 cash bonus after you spend $3,000 within the first three months.

If you owe more than $1,000

Blue Cash Everyday® Card from American Express

Fees

  • No annual fee
  • Foreign transaction fee of 2.7 percent
  • Introductory 0 percent APR on purchases for 15 months
  • Variable APR: 13.99 percent to 23.99 percent

Advantages

  • Earn 20% back on Amazon.com purchases on the Card in the first 6 months of Card membership, up to $150 back. Plus, earn $100 back after you spend $2,000 in purchases on your new Card within the first 6 months of card membership. You will receive cash back in the form of statement credits.
  • Earn 3 percent back at U.S. supermarkets (up to $6,000 a year in purchases, then 1 percent).
  • Earn an unlimited 2 percent back at U.S. gas stations and select U.S. department stores and 1 percent back on all other spending.
  • Terms apply.

What you’d earn

For people who want a more all-purpose card for paying Uncle Sam, you might consider the Blue Cash Everyday Card from American Express. You earn 20% back on Amazon.com purchases on the Card in the first 6 months of Card membership, up to $150 back. Plus, earn $100 back after you spend $2,000 in purchases on your new Card within the first 6 months of card membership.

The information about the Capital One Savor Cash Rewards Credit Card has been collected independently by Bankrate.com. The card details have not been reviewed or approved by the card issuer.

Written by
Natalie Campisi
Mortgage reporter
Natalie Campisi is a former mortgage reporter at Bankrate.