Tax season is upon us and the April 15 deadline to send your money to Uncle Sam fast approaches. Before you write a check, though, I thought it would be a good idea to go over the various other options you have where you can earn points and miles by paying your taxes.
Uncle Sam is reminding you the April 15th deadline is approaching fast.
In fact, one of the questions I’m asked the most is whether paying taxes with a credit card is a good way to rack up points and miles. Unfortunately, there’s no simple answer, and it always depends on your situation since there are fees involved with credit cards and debit cards, meaning the value of the points or miles you earn by charging your taxes can drastically outweigh the value you can get from them.
There are several sites that will process your tax payment, but they all charge fees that can negate the value of any points earned. In general, these fees make the cost of getting points/miles slightly cheaper than buying miles directly from the airlines, but that still makes them expensive.
There are a few situations where using a credit card might make sense, though:
1. When you can write off the cost of the processing fees as a business expense.
2. To hit a spend threshold on your credit card and the additional benefits you receive outweigh the cost of making the charge.
3. You have a cash back card, like the PerkStreet 2% card, though depending on fees, you could be losing a bit of money on this.
As I said, apart from the fees, there are other things to consider, like whether this might be a quick and easy way to meet minimum spending requirements on a new credit card in order to get a bonus, or whether paying your taxes with a credit card will earn you some sort of bonus spending threshold where you earn even more bonus points, or something like the Hilton Diamond status, which is why I paid my quarterly taxes with my Citi Hilton HHonors Reserve card – I’ll get into spending bonuses below.
Because of sometimes high fees, in general I won’t use a credit card to pay taxes unless it’s to fulfill one of the conditions above, but another option to consider is using a points-earning debit card like the Delta SunTrust cards since the fees on these are usually much lower and at a flat rate (more on this below).
PayUSAtax.com options
Payment Services and Fees
You have several options to pay your taxes using a debit or credit card. Here is the official government list of approved tax payment vendors, and here are the rates they charge for using a credit card versus a debit card to pay taxes:
PayUSATax.com: 1.89% for credit cards or only $3.49 for debit cards. They accept Mastercard, Visa, Discover, BillMeLater, Star, NYCE, Pulse and Accel cards.
OfficialPayments.com: Generally 2.35% when using American Express, Mastercard, Discover or Visa , or a $3.95 convenience fee per transaction with debit cards including Accel, NYCE, Pulse and Star. So a $1,000 tax bill will net you 1,000 miles and cost you $23.50 on your Visa, and just 2.1% when using an Amex to pay a federal tax of $100,000 or more. You can also use your Amex Membership Rewards points to pay your taxes and convenience fee at the rate of 2,000 points per $10.
ChoicePay: 1.88% fee for credit card tax payments versus only $3.48 flat fee for debit card payments.
Pay1040.com: 2.35% when using credit cards including American Express, Discover, Mastercard and Visa. A $3.89 flat fee per transaction using NYCE, Pulse and Star debit cards.
Business Tax Payment: 2.35% fee when using credit cards or a flat fee of $2.99 when using a debit card.
There are plenty of options to pay your taxes with a credit card – just beware fees.
So to take a quick example, let’s say you owed $10,000 in taxes. If you were to pay using PayUSATax.com, you would incur a fee of either $189 for using a credit card, or just $3.49 for using a debit card. Clearly saving 98% is the way to go if you can swing it with a debit card. However, some debit cards prohibit earning miles from tax payments. For instance, the US Airways Visa debit card states here that “mileage credit will not be awarded for federal, state or local tax payments, or similar payments to federal, state and local government agencies,” so be sure to check the terms of your card.
Also keep in mind that when you pay your taxes using a credit card or debit card, the IRS requires you to do so in two payments or less, so you’ve got to have the money available in the account your debit card draws from to cover your tax burden in one or two payments. You can file a payment agreement where you pay your taxes in monthly installments, but that incurs interest, which could negate the value of the points you’d earn further. So a credit card might be your best option, though just be sure your spending limit can take the charge.
Using American Express Bluebird
Since its introduction last year, the Amex Bluebird card – a reloadable prepaid card that acts sort of like a hybrid credit card-debit card-checking account – has been one of the most powerful tools in every point collectors kit thanks to the ability to purchase Vanilla Reloads using points-earning credit cards and load the amount from the Vanilla Reload directly onto the Bluebird card then use those funds to pay bills and expenses that you can’t usually use credit cards for such as mortgage and car payments.
However, there are a few limits to the Bluebird that do constrain its usefulness – although it has just added a new checkbook feature that can be to cardholders’ advantage especially for taxes.
While the card’s Bill Pay feature (the same one you can use to make those other payments) has been around since the card’s inception, you cannot use it to pay your taxes – that is explicitly stated when you log into your Bluebird account, and you are also limited to spending just $10,000 per month via this feature and $5,000 for non-registered payees while just general send money transactions (where you transfer to other accounts) are limited to $2,500 per transaction and per month.
Second, is that using Vanilla Reloads, you’re limited to loading $5,000 per month onto the card; and let’s say you’re using a checking or savings account to fund it, you’re also limited to $10,000 per month while debit cards can only be used to load up to $100 per transaction and per day up to $1,000 per month and there’s a $2 fee for each transaction, so that’s not a good deal.
However, as I mentioned, Bluebird recently added a couple new features that increase its usefulness.
Although Bluebird has increased the total account balance limit to $100,000 (up from the previous limit of $10,000), the total balance of funds added by methods other than check by mail (another new feature where you can send in your checks to be deposited) and direct deposit is still capped at $10,000.
Second, account holders can get actual physical checks in books of 50 ($19.94 + $5.94 shipping) or 100 ($26.94 + $6.94 shipping) where you can get one free book until May 21, 2013 (so order the 100). You can order these checks by logging into your account.
Just keep in mind that you are limited to spending $100,000 per year, including via Bluebird checks, click the “My Account” tab and scroll down to where it says “Order Checks” and pick your amount.
There is a little bit of a process to writing a check from Bluebird which includes pre-authorizing the amount online in your account and getting an authorization code which you need to write onto the check itself, and when you spend $2,000 or more that authorization can take about 2 business days, so don’t wait until April 14 to start!
Despite these limits, Bluebird checks can still be a great way to earn some extra points on your taxes, especially if your tax bill is under $10,000 and you have a place where you can buy Vanilla Reloads using a points-earning card.
Let’s say your tax bill is $10,000 on the dot. That would require you to buy 20 Vanilla Reloads in the maximum denomination of $500 plus a $3,95 fee per card, spending a total of $10,079. So if you’re using a credit card like the Starwood Amex to rack up extra points, you’d earn 10,079 points for $79, so you’re paying 0.78 cents per SPG point – a pretty good deal in my estimation! Just remember that you’re limited to $5,000 per month (not calendar month, rolling month) with Vanilla Reloads, so hopefully you’ve got some loaded already.
Even if your bill is higher than 10,000, the way you could take advantage of this is by using Vanilla Reloads to get to the $10,000 mark and then sending in a check by mail (if you don’t want to set up direct deposit) for the rest of the amount since then your account limit and send money limit via Bluebird checks goes up to $100,000. Although you might still just be earning 10,000 points and writing the rest of a check, at least you’re earning some points.
The Delta Reserve gives 30,000 MQM’s after spending $60,000 per year.
Spending Threshold Bonuses
As I mentioned, one good reason to consider using your credit card to pay your taxes despite incurring fees, is to earn spending threshold bonuses of points and other perks.
Cardholders of the British Airways Visa get a “Travel Together” companion ticket on British Airways when they spend $30,000 within a calendar year.
Several other airline co-branded cards offer both elite-qualifying mileage bumps as well as redeemable bonus miles for meeting certain spending thresholds, so paying your taxes with some of these cards could be a good way to get closer to your next status level or earn both the usual amount of miles on the spending plus thousands in bonus miles.
The Delta Reserve card gives 10,000 MQMs with first purchase and another 15,000 MQM’s when you hit $30,000 in spend within a calendar year plus an additional 15,000 MQM’s at the $60,000 mark during the same calendar year. The Delta Platinum Amex offers 5,000 MQMs with first purchase and then 10,000 MQM’s for $25,000 in spending, and another 10,000 MQM’s for $50,000 in spending, for a total of 20,000 MQM’s.
The Citi Executive AAdvantage Card awards you with 10,000 elite qualifying miles after $40,000 in purchases each calendar year while the Citi Platinum Select AAdvantage Visa Signature earns a $100 American Airlines flight discount when you spend $30,000 in a calendar year. The US Airways Mastercard offers 10,000 Preferred Qualifying Miles after cardmembers hit $25,000 in spending each year.
The Virgin Atlantic American Express earns 15,000 bonus miles when cardholders spend $25,000 annually, the Virgin America Visa earns 10,000 status points every year you spend $25,000, the United MileagePlus Explorer card earns 10,000 bonus award miles each calendar year you spend $25,000, and the Southwest Rapid Rewards Premier card earns 1,500 Tier Qualifying Points for every $10,000 in purchases.
Hotel cards are in on the bonus game too. Both the personal and business Starwood American Express cards earn SPG Gold status when you spend $30,000 within a calendar year, for example.
The Citi Hilton HHonors Reserve card gives Diamond status after $40,000 in spending a year.
The Citi Hilton HHonors Reserve card earns a free weekend night at $10,000 in spend and Diamond status at $40,000 within a calendar year just like the Hilton HHonors Surpass card (the status, not the free night).
The Fairmont Visa Signature earns one free night every anniversary that you spend $12,000 within the year; the Ritz-Carlton Rewards card earns gold status every year you spend $10,000 or more on the card; the Marriott Rewards Premier card earns 1 elite night credit for every $3,000 spent; the Hyatt Visa, meanwhile earns you a 2 stay/5 night credit for spending $20,000 annually, and an additional 3 stay/5 night credit for spending $40,000.
Meanwhile, the American Express Premier Rewards Gold card earns 15,000 bonus Membership Rewards points per calendar year when you spend $30,000 on it.
The US Bank FlexPerks Visa Signature earns 3,500 bonus points when you hit $24,000 in net purchases during a calendar year.
As always with the “is it worth it” questions in the points game, before deciding what to do, you need to take a long, hard look at your travel patterns and upcoming travel plans and then calculate your particular expenses and potential benefits to determine whether paying a 1.89% fee is worth it for your needs or not.
My Personal Strategy
I think my best strategy will be to load up my Amex Bluebird with Vanilla Reloads in order to keep costs down, though I will put spend on my Citi Hilton Reserve to requalify for the free weekend night after $10,000 in spend.
Although there what I think I might do is to spend $10,000 loading up my Amex Bluebird card which should almost take care of the minimum spending requirements on all of these and then charge other large amounts on my other cards to earn the calendar year spending threshold bonuses – perhaps racking up another BA Travel Together ticket, those 15,000 Amex Membership Rewards points from the Premier Rewards Gold and then consider whether spending my way toward Hyatt or Hilton Diamond (well, probably not Hilton Diamond since I’ve just about had it with the program after the recent devaluation) is worth paying the extra fees for paying by credit card or if it’s a better deal just to try to rack up the stays cheaply.
What are your plans for tax season? Do credit cards or Bluebird play a part in them?