Should You Use a Credit Card to Earn Miles When You Pay Taxes?

Reader Gail asks,

I have a lot of taxes to pay – which credit card do you recommend, if any?

I pay taxes using my Suntrust Delta debit card… less than $3 for the payment, earns 1 Delta mile per dollar. Sadly that’s no longer available. You can still get an American debit card that earns 1 mile per 2 dollars and gets the low debit card fee. However they won’t process large charges the way Suntrust will with its $35,000 per day transaction limit.

Credit cards, though, are too expensive to process to make paying with those worth it for the miles, but it can be worth it as a way to meet minimum spend for a big credit card signup bonus.

You’ll pay at least 1.87% of your tax bill as a fee for making the payment on a credit card (e.g. from PayUSATax). OfficialPayments.com and Pay1040.com both charge 2.35%.

If you make sure you’re using the low-cost provider, you can earn a small margin — a 2% cash back card will net you 0.13% of your tax bill. A card like Barclaycard Arrival+ nets you 2.2% towards travel, so if you’re willing to redeem for future travel through their system you can net as much as 0.33%. That’s a really small margin, and requires trading cash for future travel, a tradeoff I wouldn’t make. Perhaps if you’re tax bill is big enough, but even a $100,000 tax bill will net just $130 margin with a 2% back card.

A big payoff like a signup bonus changes the equation. Paying 1.87% on a $3000 charge to meet minimum spending means you’re out of pocket $56.10 — well worth it for 40,000 or 50,000 miles if you would not otherwise meet the spend requirement.

The other time it can make sense is to earn threshold bonuses. For instance, you may want to hit $40,000 in spend on a the Citi American Executive card for 10,000 elite qualifying miles or on the Hyatt Visa for 5 stays and 10 qualifying nights towards Diamond elite status. $40,000 on either the Citi Hilton Reserve or American Express Hilton Surpass card will net you Diamond status in the Hilton HHonors program.

The $748 cost for $40,000 in charges (you’ll only need to charge what you can’t spend on your own of course) could be worth it for 10,000 elite qualifying miles with American considering that flying that many miles will likely cost you at least that much — not to mention about 20 hours of your time in the air.


About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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Comments

  1. Why not get the PayPal debit card then buy the loads at CVS using Diner’s for 3X…..you have to plan for the monthly 4k iimit but that’s not rocket science……

  2. I’d pay 1.87% to get 1.5 MR points with the Preferred Card.
    MR’s . That’s 1.25 cents per mile if my math is correct. If not, take X^2=2^X and solve for X.

  3. Which site do you use the suntrust card for tax? Mine is a masterCard and all the sites seem to charge the same fee as th credit card.

  4. I’ve used credit cards to pay taxes every time–because I’m going for premium (usually F class) airline awards that would cost FAR more than the slightly higher cost of using the credit cards. I always apply for a card with a big spend requirement and concomitant bonus well before I know I’ll have the tax bill and to ensure I get it before the taxes are due. Otherwise, I’ll almost always use the SPG Amex to get the SPG points, which are extremely valuable for premium awards on so many airlines. (I also can use the SPG points for aspirational stays at SR and LC properties.)

    If you aren’t going to fly in premium classes or use points to stay at otherwise very pricey hotels, then using a credit card probably isn’t worth the extra miles/points for the extra money you have to spend on the fees. But when you’re going to very expensive awards, the extra money spent on those fees PALES in comparison to the value you get from the awards.

  5. Ben Hughes, I agree with you – I’ll pay my taxes with the SPG Amex or Club Carlson Visa every time.

    Also, if you’re paying Schedule C business expenses or Schedule E rental expenses (property taxes, anyone??), you can write off the fees as “bank charges”.

  6. I pay with my united club card, 1.5 miles per dollar, which works out to around .025 to .03 per $, depending on you you value them. I generally get at least .02 per mile, so I’m at the high end of them.

  7. Credit card processing fees are considered by the IRS to be a miscellaneous itemized deduction. You can only deduct miscellaneous expenses that exceed 2 percent of adjusted gross income. If your only misc. expenses are tax payment processing fees, it’s highly unlikely they’ll meet this threshold. Say you are paying 39.6% federal taxes, at most you’re going to pay 1.87% of the 39.6%…

  8. Gary – in response to #11 – that’s true for personal tax payments. So, for example, I get no deduction for my Federal income, State income, or personal residence property tax payment credit card fees. But I also pay property taxes for my rental properties; two knowledgeable tax practitioners have advised me I can deduct credit card fees for these tax payments on Schedule E (which means they reduce my AGI – an excellent outcome).

  9. @UAPhil yes I was referring to paying income tax payments, including estimated tax and including for schedule C business income. I do not know whether paying credit card fees to make property tax payments would qualify to be written off on the appropriate schedule.

  10. I have an approximate 250k tax payment coming up. With the Citi American card do I get 10,000 elite miles PER $40,000 in spend or is it just a one times — Spend $40,000 and you get the 10,000 miles (no benefit in spending above this)?

    Thanks

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