Using your credit card brings you a plethora of perks. Most of us love these cashbacks, reward points, discounts, and several other monetary incentives. How about paying your federal taxes using your credit card?
Have you considered this idea of making a lump sum transaction through your credit card and boosting your reward points? Also, you can savor a grace period of 20 odd days if you time your payment intelligibly.
Of course, it does. Being tactical with your approach, you can reap several benefits if you choose your credit card as your mode of tax payment. For instance, many taxpayers use 0% interest credit cards while making these payments. Let’s understand how you can capitalize on opportunities and benefit while making such payments.
Can I pay my taxes with a credit card?
Yes, you can use a credit card to pay your federal taxes. However, the question is, under what circumstances should you choose a credit card to pay your taxes?
According to the Taxpayer Relief Act of 1997, the IRS has granted you the liberty to make tax payments through credit cards. So, in most US states, you will enjoy the provision of paying your federal tax using a credit card.
However, whether or not you should go for a credit card tax payment depends on several conditions. To help you embrace the right financial track, we have recommended three of these situations.
- All sorts of credit cards bring you the opportunity to earn rewards for making payments. So, how about fulfilling your credit use mileage by making a lump sum payment as tax? In the first place, choose the right credit card that brings you the provision of earning enough reward points.
- Some credit cards come with a 0% introductory APR feature. So, if you are willing to pay your taxes using a credit card, get one of these cards first. Taxpayers who fail to qualify for these cards can go for an installment plan.
- With some credit cards, you can earn a welcome bonus when you spend a sizable amount in the first month. If you get a credit card with this feature, why not make the tax payment using the card to reap the bonus? This reward will compensate you significantly for the fees charged to your credit card.
How do you pay federal taxes with a credit card?
Wondering how to go about paying your taxes with a credit card? Here’s how.
1. Payment processing platforms
The government of America isn’t entitled to receive tax payments through credit cards. However, the US government has authorized three companies that can receive tax payments through credit cards on its behalf and process the payments. These three payment processing companies are:
- PayUSAtax: Credit card fees 1.85%, minimum charge $2.69
- ACI Payments, Inc.: Credit card fees 1.98%, minimum charge $2.50
As mentioned above, all these platforms charge a fee for processing your tax payment. So, it’s crucial to factor in this additional cost when you use your credit card to pay federal tax.
As the regular formalities, you must furnish your basic details like name, address, contact information, date of birth, and ID number on all three platforms.
2. IRS website
You can directly visit the IRS website to make your tax payments. Simply adhere to the instructions and enter the details of your credit card.
Likewise, you can directly pay your state tax using a credit card by visiting the state’s website.
Besides, you will come across tax return agencies that operate in brick-and-mortar set-ups. They might accept credit cards as a mode of payment, along with other methods.
Benefits of paying taxes with a credit card
Now, let’s look at the plethora of benefits of paying your federal taxes using a credit card.
1. Get more credit card rewards
Do you have a rewards credit card? If you don’t, try getting one as the tax payment date approaches. With this type of credit card, you would earn reward points that you can convert to cash or use for making other purchases. Given that your tax amount would be sizable, you have a chance of receiving a sizable reward.
Let’s say you visit Pay1040.com, the cheapest payment processing website, to pay a tax of $1,000. The processing fee would be $1.87. So, you would need at least a 2X rewards credit card so that it compensates you more than what you pay as the processing fee. In this case, you can use the Citi Double Cash Card, where you can get 2% cashback. Here, you get 1% cashback on all purchases, while you receive the additional 1% after clearing your credit card bill.
Going by this calculation, you earn a cashback of 0.13% when you pay a tax of $1,000. This comes to around $1.30, which looks insignificant. However, if your tax exceeds $1,000, you will be saving more. A person paying $50,000 as federal tax would save around $75.
Besides, some credit cards offer up to 10X rewards. Naturally, when you use one of these cards to clear your tax, you end up saving more.
2. Get a sizable welcome bonus
Apart from earning rewards, the welcome bonus serves as a great incentive to credit card holders. When you fulfill the expected spending requirements of the card, you can qualify for a sizable bonus.
Since you would pay a substantial tax amount through the card, you would probably pay more than the card requires. In return, you can earn hundreds of dollars by exchanging points.
Let’s take the instance of the Chase Sapphire Reserve card. After you get this credit card, spending $4,000 in the first three months can fetch you 60,000 reward points as a welcome bonus. So, if you pay a tax of at least $4,000 through Pay1040, you will earn bonus reward points of around $900. Although you need to pay a small processing fee of $74.80, you can earn much higher. This $900 can be redeemed and used for travel purposes.
Taxpayers holding the Capital One Venture X Rewards Credit Card can earn even more reward points. Spending $4,000 on this card would give you 75,000 bonus miles.
Now, if you have both these credit cards, and your tax bill exceeds $8,000, how about splitting your bill payment across two cards? This way, you can earn handsome rewards on both cards while paying taxes.
Remember, credit cards with high cashback or reward points can help you earn rewards even after you receive your welcome bonus.
3. Meet your credit card milestones
Well, have you landed in scenarios where you are miles away from meeting the minimum spending per year to claim a bonus on your credit card? Paying your federal tax through your credit card can help you reach your spending threshold. So, even after earning your bonus and regular rewards, you can qualify for more benefits.
At times, cardholders want to spend a lump sum amount to reach elite status on an airline or hotel credit card. For instance, taxpayers holding the United Explorer Card must spend $12,000 in a calendar year to earn 500 Premier Qualifying Points. This is in addition to the 50,000 bonus points you earn once you purchase goods worth $3,000 in the initial three months.
4. Get a loan for more than a year
Well, you might be comfortable taking a short-term loan to pay your federal tax. By choosing the right credit card to make the payment, you need not pay any interest for more than a year!
Consider getting the Chase Freedom Unlimited card, which grants you the privilege of 0% introductory APR for the initial 15 months after you open the account. This is applicable to balance transfers and purchases. Next, the variable APR would range between 19.49% and 28.24%.
Currently, you can earn a welcome bonus on this card up to $300 in the first year. This is calculated at 1.5% cash back, while you need to spend $20,000.
However, stay vigilant, as you will be paying regular interest charges after the initial 15 months. So, take care to repay the amount within this period to pay zero interest!
Nevertheless, who gives you a loan at 0% interest for 15 months to clear your federal tax?
Drawbacks of paying taxes with a credit card
The benefits of using your credit card to pay your federal taxes shouldn’t blind you to the drawbacks of this process. Carefully scrutinize the following charges and use your discretion while using your card.
1. Processing fee
The minimum and maximum processing fee taxpayers need to shell out while using a credit card ranges from 1.85% to 3.93% of the amount paid. This stays within the bracket between $2.50 and $3.95. If your credit card rewards are too less that it doesn’t compensate you for this charge, there’s no point using the card to pay tax.
2. High interest rates
On average, you would be shelling out as much as 19% interest rate or even higher on a standard credit card. This interest rate can make credit card payments more expensive than popular types of loans. So, take care to use your credit card to clear your tax only when you have enough money in your bank to clear your dues the next month. Otherwise, the high interest rate would rob you of the benefits of all the rewards.
3. High credit utilization
Do you know that high credit utilization can adversely impact your credit score?
When you shell out a lump sum amount as federal tax through your credit card, it can take a hit at your credit score if you don’t clear the bill the next month. You would be using a higher percentage of your available credit.
Tips to pay federal tax using a credit card
While it might be tempting to pay your federal tax using your credit card, don’t overlook the following aspects.
1. Don’t pay interest
There’s no point in paying interest while you use your credit card to clear your federal tax. In case you are facing a financial crunch, go for a loan that would keep your interest low. Ultimately, paying interest wouldn’t help you capitalize on the rewards.
2. Use multiple cards
How about maximizing your benefits by using two credit cards? You can qualify for two sign-up bonuses if the tax amount is large enough. At the same time, you won’t exceed your credit limit by an alarming margin on a single card.
3. Use a balance transfer credit card
When you pay your federal tax using a balance transfer credit card, you get the liberty to move your balance to a low-interest card from a high-interest one. Usually, these cards come with promotional APR periods.
If your credit score looks healthy, you can be eligible for a lower APR to clear the high balances. Try to pay off the debt on your credit card before the promotional period ends. This ensures that you won’t be shelling out higher interests.
Should you pay taxes with a credit card?
Now that we have demonstrated the benefits and drawbacks of paying federal taxes using a credit card, you are well-informed to make a call. In a nutshell, use your credit card for tax payments only when you have a concrete plan. For instance, you need to calculate the monetary benefits in terms of reward points, welcome bonuses, and reaching milestones after considering the processing charges.
Again, if you try to capitalize on the 0% APR on introduction, calculate your monthly payment so that you can clear off the bills before the offer ends.
Let’s summarize the few circumstances when a credit card should be your first choice for clearing your federal tax.
- You need more time to clear off your federal tax.
- You need not pay additional interest since you can benefit from an introductory 0% APR credit card.
- The lump sum payment will help you win substantial monetary benefits through reward points.
- The sizable payment helps you qualify for elite status on your credit card or upgrade it.
With the right strategy, paying your federal tax with your credit card can be an intelligent decision. Weigh your overall benefits before you use your cards to clear tax.
Being tactical with your decision to pay your federal tax with your credit card, you can fulfill the purpose of having the cards! Just ensure that the welcome bonus or reward is more than the processing fee and that you don’t end up paying high interest rates.
Stick to other options for paying your federal tax if you are not sure of the benefits that your card can bring in. Also, try to get some high-reward credit cards to make the most while clearing your tax.