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Updated Jan 2022 to reflect that Pay1040 decreased their fee from 1.99% to 1.87%.
In this article
Should you pay taxes with a credit card?
There is one credit card that I would pay my taxes on (and advise you to) without blinking an eye.
What in the world is Dave on about? There are FEES when you pay taxes with a credit card!!!!
But hear me out. And first, I must clarify that for everything I’m going to write in this article, I am making the assumption that you have the funds to simply mail the IRS a check and would prefer to pay, effectively, less if you could. If you cannot repay the credit card in full when the statement is due, then do not continue reading. Consult your tax advisor or financial planner in that case.
The “can’t lose” profit paying taxes
You can pay tax using a credit card with a 1.87% fee at PayUSATax. With the Citi Double Cash credit card, you earn 2% cash back (1% when you spend and 1% when you pay the bill).
I know, that doesn’t sound like much – and it’s not – but it’s the optionality of the Citi Double Cash credit card when combined with a Citi Premier or Prestige card that makes this so appealing. The unique ability of the Citi Double Cash to earn 2% in cash back off the bat with the option to convert those, 1 to 1, to Citi ThankYou points later is what makes this so attractive.
Cash Now or Points Later
This is so key right now. If we aren’t “back to normal” in 3-6 months, you may want the cash. If you paid $50,000 in tax liabilities, you paid $935 in fees and earned $1,000 in cash back. You’re net positive $65.
You have $1,000 in your cash back account which you can get deposited straight into your bank account, but there’s no rush.
Maybe in a year you want to book a round trip from New York (Newark) to Los Angeles in Business Class. If you can find the award space, you could book that for just 25,000 Turkish miles (total, round trip). Those miles can be transferred 1:1 from ThankYou points.
So, you transfer $250 worth of points into ThankYou points, becoming 25,000 ThankYou points. You transfer those to Turkish and book your flights. (Note: there is a delay of 1-2 days to transfer ThankYou to Turkish so in reality you’d probably want to transfer once you had a hunch you could find flights that worked).
You just got a flight worth $800 ++ and have $750 left over from your $1,000.
You aren’t buying points – you’re acquiring optionality on them.
That’s my stock market brain comparing this idea to buying options, although in this case you are being paid 0.13% to TAKE them. You don’t have to pay a premium like you would for a stock option. Even if you didn’t have (or keep) a Citi Premier or Prestige to be able to transfer down the road, your worst case is a 0.04% gain.