6. Paying Your Taxes by Credit Card (Part 1)

Welcome to Point Me to First Class, the only show for employed professionals, entrepreneurs, and business owners who are looking to optimize their higher-than-average expenses to travel the world. I'm your host, Devon Gimbel, and I believe that your expenses are your greatest untapped asset if you know how to leverage them. Ready to dive into the world of credit card points and miles so you can travel more, travel better, and travel often? Let's get started.

Hey everybody. I am so excited about today’s podcast episode because this is a very special time of the year, at least if you're based in the U.S. Now, if you're listening to this episode in real time, it is Monday April 10^th, which means that if you're based in the U.S. or if you're a U.S. citizen lucky enough to be living abroad, it is almost Tax Day, the annual day on which your income tax returns are due to be submitted to the U.S. government, and at which time you may or may not have the lovely experience of having to make a tax payment to the IRS.

Now, depending on your circumstances, you may have a few additional Tax Days throughout the year if you pay quarterly estimated taxes like my family does. But almost all of us will be filing taxes and possibly having a tax payment due in a few short days on April 18^th.

One thing that has greatly lessened the sting of paying taxes, and sometimes a lot of taxes, for me has been the opportunity to earn points, potentially a lot of points, by making tax payments using a points earning credit card. The opportunity to earn hundreds of thousands of extra points a year by paying our taxes with points earning credit cards first became apparent to me around 10 years ago when my husband became self-employed and it seemed like we went from paying a lot of taxes once a year to paying a lot more taxes four times a year compared to when we were both in W2 employed positions.

This is one area where I think whether you are a high income employed professional or a self-employed business owner, your tax expenses can represent an enormous points earning opportunity that so many people are not even aware of.

I want to make sure that you not only know how to earn lots of valuable points by paying for your taxes with rewards credit cards, but just as importantly how to evaluate whether that’s even the right decision for you since you will have to pay a fee in order to be able to use a credit card to make your tax payment.

Paying taxes by credit card will not be right for everyone. I don’t ever make blanket statement recommendations like everyone should pay their taxes using a rewards credit card to earn points because I don’t believe that’s true. What I do believe is that paying your taxes with a points earning credit card can be a fantastic points earning opportunity for many people who don’t even know that that option exists.

This is a fairly dense topic. So I'm actually going to be splitting this podcast into two parts so that you have time to digest and process everything that we’re going to be talking about. Today I'm going to cover how to actually pay your taxes by credit card in order to earn points if you want to, and how to determine if it makes sense for you to pay your taxes by credit card taking into account the cost of the fee you’ll have to pay.

Next week I’ll cover the second half of this topic, which is what specific rewards credit cards are the best ones to use for making tax payments so that you can maximize the number of points you can earn by paying your taxes with a credit card.

Before we get started, I want to quickly remind you that I am not an accountant or a certified financial or tax professional. Therefore please always do check with your own accounting, financial, and tax professionals before making any decisions about what's best for you regarding the information that I'm going to be sharing about paying your taxes with a credit card.

So, first things first. How do you go about paying your taxes by credit card if you even want to? It is actually very easy to submit tax payments online using a credit card to pay. To pay your federal taxes online using a credit card, you simply have to go to the website www.irs.gov, and we’ll link that website up in the show notes for your reference. Then click on the tab at the top of the page that says pay, and then choose the option that says debit or credit card.

For paying federal income taxes, you have a choice of three different payment processing platforms or options that you have for submitting your tax payment online using a credit card. What you will notice is that regardless of which payment processing platform you choose, you will have to pay a fee in order to make your tax payment by credit card. Depending on the payment processing platform that you choose, the fee will range from 1.85% to 1.98%.

So that means that if you're making a $1,000 tax payment at a 1.85% fee rate, you'll be paying $18.50 in fees, and your total tax bill will come to $1,018.50. If you're making a $10,000 tax payment at a 1.85% fee rate, you'll be paying $185 in fees, and your total tax bill will come to $10,185. If you're making a $100,000 tax payment at a 1.85% fee rate, you'll be paying $1,850 in fees, and your total tax bill come to $101,850. You get the idea.

The IRS actually allows you to use up to two different credit cards per payment per tax period per payment processing platform, which is a lot to say, but you can theoretically split up your tax payment between six different credit cards if you wanted to. I personally never do that, but next week when I talk about which credit cards are best for making tax payments, I will discuss why you may actually want to use more than one credit card for your tax payment.

You can also choose to pay a portion of your taxes by credit card and make the remainder of your payment by check or bank transfer if you want, though, of course, you're not going to be earning any points for any portion of your payment that you make using a payment method other than a points earning credit card.

Many individual states also allow you to make any state tax payments due using a credit card online to pay as well. To find out if your state offers this option, just Google your state name and pay taxes by credit card to see what options are available and what fee will be charged if you do make your state tax payment by credit card.

For example, in my state of Illinois, the tax payment processing platforms charge a fee ranging between 2.25% and 2.49% to pay state taxes by credit card. Note that just because you may choose to make a federal tax payment online using a credit card does not mean that you also have to pay your state taxes by credit card if the fee is too high or if you just don’t want to.

Actually making your tax payment online using a credit card is very easy since you’ve chosen which payment processing platform you want to use. All you have to do is follow the prompts and enter your identifying information like your name, date of birth, social security number, and credit card information and confirm that you want to submit payment using a credit card. While you will be given an option to print a receipt of your tax payment submission, I also recommend taking screenshots of your tax payment confirmation and saving that just for your own records.

That’s it. Once you submit your payment, you're good to go. Just because you can pay your taxes using a credit card in order to earn points or miles doesn’t mean that you should or that it’s going to be the best fit for you. Just because it might be a great decision for you to make your tax payments by credit card one year, it also doesn’t mean that that’s always going to be the best fit for you in subsequent years.

So how do you know if it’s going to make sense to pay your taxes online using a credit card in order to earn points or miles considering that you will have to pay a processing fee in order to use your credit card to make your tax payment? Simply I think it makes sense to consider paying your taxes using a rewards credit card if you can get more cash equivalent value from the points that you'll earn using your credit card to pay your taxes than the cost of the processing fee you'll be charged to pay your taxes by credit card.

It would never make sense to pay $100 or $1,000 or more in processing fees to pay your taxes using a credit card if you couldn’t get $100 or $1,000 or more in value from the points that you'd earn for that charge, right? In fact, I think most of us probably wouldn’t bother paying our taxes with rewards credit card to earn points unless we knew we could get substantially more cash value from the points we earn than the cost of the processing fee we have to pay.

This is where it is so important to do the math for yourself so that you can make an objective determination about whether paying your taxes using a credit card in order to earn points makes sense for you. In order to do the math to determine if it’s worth it for you to pay your taxes by credit card in order to earn points, you only really need to know three things.

Number one, you have to calculate the cost of the fee that you'll be charged to pay your taxes by credit card. To do this, just multiply your tax bill by the percentage processing fee by the payment processing platform that you're going to use to make your payment.

Number two, you need to calculate how many points you're going to earn by making your tax payment with your rewards credit card. Remember that you'll earn points on the total amount charged to your credit card, which includes both the tax payment itself and the cost of the processing fee. Number three, you need to calculate how much value you'll need to get from the points that you earn on your rewards credit card from your tax payment in order to break even and ideally exceed the cost of the processing fee.

In my opinion, it only ever makes sense to pay a processing fee in order to use a credit card for a given expense if you have high confidence that you're going to be able to get much more value from the points that you earn for that payment than the cost of the processing fee that you have to pay. So let’s take an example and walk through those steps so you can see how this might look in real life.

In one of the Point Me to First Class Facebook groups that I run, someone recently posted about having an upcoming tax bill of $55,000 and asked whether it was worth paying a processing fee in order to earn points using a rewards credit card in order to make that payment. This is what the math looks like walking through those three steps that I just described.

First, step one is to calculate the cost of the processing fee that you'd be charged to pay the taxes by using a credit card. At 1.85% processing fee charged to pay a $55,000 tax bill using a credit card, that would equal $1,017.50 in fees for a total tax payment of $56,017.50. Step number two is to calculate how many points you'll earn by making that entire payment by credit card. This, of course, depends on the specific points earning rate of the rewards credit card that you choose to make your tax payment.

If you use a credit card that earns one point for every dollar spent, a $56,017 tax payment would earn you 56,017 points. If you use a credit card that earns 1.5 points for every dollar spent, that $56,017 tax payment would earn you 84,026 points. If you use a credit card that earns two points for every dollar spent, that $56,017 tax payment would earn you $112,034 points. Clearly it is advantageous to have a rewards credit card that will earn you more than one point per dollar spent in order to maximize the number of points you can earn by paying your taxes with a rewards credit card.

Unfortunately, there are no points earning credit cards that have tax payments specifically as a bonus category to earn extra points, but there are several great rewards credit cards that offer more than one point per dollar spent for what is called non-bonused or non-category spend, which is what you would want to reach for when making a tax payment.

Finally step three. We need to calculate how much value you’ll need to get from the points you earn on your rewards credit card from your tax payments in order to break even and ideally exceed the cost of the processing fee. Here's how you can do that.

Remember that for a $55,000 tax bill, a processing fee of 1.85% will equal $1,017.50 in fees. All we have to do is divide the cost of the fee, $1,017, by the number of points we expect to earn using our rewards credit card for our tax payments to calculate how many cents per point in value we need to get from our points when we go to use them in order to get more value from them than the cost of the fee.

So if you use a credit card that earns one point per dollar spent, you would earn 56,017 points for your $56,017 tax bill. At that rate, you would need to get at least 1.8 cents per point of value from your roughly 56,000 points in order to book travel worth as much as the cost of the processing fee.

To calculate the cents per point value needed to break even, all I did was divide the cost of the processing fee, which is $1,017, by the total number of points that I would earn using a credit card that earns one point per dollar spent, which is 56,017.

Now, some of you might be wondering how reasonable it is to actually get 1.8 cents per point of value from your points because if that is something that’s really, really easy then you're probably going to be more likely to consider using a rewards credit card to pay your taxes even taking into account having to pay the processing fee in order to do so.

But if getting 1.8 cents per point of value out of your points is really, really difficult then it would be much less compelling a consideration to pay your taxes using a credit card. If you’ve never redeemed your points for travel and you have no desire to learn how to get increased value from your points, or if you only ever want to redeem your points through your credit card’s travel portal, it will be very difficult if not impossible for you to get more than one to one and a half cents per point of value from your points.

So I would argue that if you fall into that category, it would not make sense for you to use a credit card to make your tax payments in order to earn points. But if you are interested in learning some strategies to get increased value from your points then I think it’s very reasonable to get 1.8 cents per point or more value from your points.

Here are just a few examples. If you earn 56,000 points paying your tax bill with a roughly $1,000 processing fee, you can use those 56,000 points to book a one way business class flight to Europe through Air Frances frequent flyer program. A one way business class flight to Europe almost always costs more than $1,000.

If economy travel is more your jam, you can fly roundtrip economy from the U.S. to Japan on ANA airlines for 55,000 miles. Most likely, that same flight is going to cost more than $1,000 to book in cash. So you’d be getting more value from your points than the cost of the processing fee that you paid to use a credit card to pay your taxes.

The math gets even better if you use a rewards credit card that earns more than one point per dollar spent to pay your taxes. If you use a credit card that earns 1.5 points per dollar spent, remember that you’d earn a little over 84,000 points for your $56,017 tax payment. But the processing fee stays the same at $1,017.

At that points earning rate, you would only need to get 1.2 cents per point in value to get more cash equivalent value from your points than the cost of the processing fee. 1.2 cents per point might not sound a lot lower than the 1.8 cents per point redemption value we just looked at, but it’s actually quite significant. I think that it is exceedingly easy to get more than 1.2 cents per point in value from your points.

For example, those 84,000 points that you earned by making your $55,000 tax payment with a rewards credit card that earns 1.5 points per dollar spent can be used to fly business class one way from the U.S. to Asia, a flight that otherwise would cost a lot more than $1,000 to book in cash.

In fact, at the time of recording this podcast, Air France is currently running a sale on economy award flights to Europe. You can book a roundtrip economy flight to Europe for around 30,000 points per person or even less. That means you could get almost three roundtrip economy flights to Europe with the 84,000 points that you'd be earning by making your tax payment with a rewards credit card that earns 1.5 points per dollar spent with a processing fee of $1,017.

Three round trip economy flights to Europe will certainly cost more than $1,000 to book. Meaning you'd be getting so much more value from the points you earn from paying your taxes with a rewards credit card than the cost of the processing fee that you paid.

The math is even more favorable if you have a rewards credit card that earns two points per dollar spent. At that points earning rate, a $55,000 would earn you a little over 112,000 points for that same processing fee of $1,017. In order to get more than $1,000 in value from 112,000 points, you would only need to get 0.9 cents in value from your points in order to break even. That is an absolute piece of cake.

As one example, you can stay five nights at a Hyatt property like the Andaz Mayakoba in Mexico for 112,000 points, a stay that otherwise would cost around $2,500 to book in cash. Or you could fly one way business class to Africa on Qatar, one of the best business class products in the world, which would otherwise easily cost $4,000 to $7,000 or more.

These are just a few of the many examples of how you can use your points to get significantly more value than the cost of the processing fee that you have to pay to make your tax payment. So here is what I want you to take away from this.

First, it is so much easier to know whether it makes sense for you to pay your taxes using a rewards credit card to earn points including paying the processing fee once you do the math using your own numbers.

Second, while I think it’s entirely possible to get more value from the points you earn from paying your taxes than the cost of the processing fee even with a rewards credit card that only earns one point per dollar spent, I don’t actually recommend that for most people unless you're already really confident in your ability to find and book flight or hotel awards where you can get at least 1.8 cents of value per point and ideally more.

But if you have a rewards credit card that earns 1.5 points per dollar spent or two points per dollar spent, I think the math starts to become much more compelling and in favor of using a rewards credit card to pay your taxes because it is highly likely that you’ll be able to get more cash value from the points that you earn than the cost of the processing fee that you’ll pay.

As I mentioned at the beginning of today’s episode, next week we will be diving in to which rewards credit cards are the most useful for making your tax payments, including both personal and business rewards credit cards. In the meantime, if you are intrigued by the idea of potentially using your taxes to earn a ton of points, take a minute to do the math for yourself using your specific numbers based on the framework I outlined earlier.

Also, use the time between now and next week’s episode to get really familiar with the rewards credit cards that you currently have. In particular, what is their points earning rate for non-bonused or non-category spend as any rewards credit card that offers more than one point per dollar spent could be a great candidate for making your tax payment. All right everybody. That is it for today. I will see you back here next week for the second part of our paying taxes by rewards credit card series. Bye everybody.

Thank you for joining me for this week's episode of Point Me to First Class. If you want more tips on turning your expenses into travel, visit pointmetofirstclass.com to learn more. See you next week.