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Every year during this time, we reconcile our earnings and deductions for Uncle Sam and either fork over more dough or humbly request that a little be given back. If you follow the strategies of this blog you may not have much tax liability to begin with, but if you find yourself in a position where you owe the IRS and were wondering if you could earn rewards points on that payment, the answer is yes. More significantly, there’s an interesting trick where you can potentially earn hundreds of thousands of points and miles by making estimated payments which is discussed below.
Tax Payments with a Credit Card
Both 2021 year-end and Q1 2022 estimated tax payments are due on April 18, 2022. Since the Tax Payer Relief Act of 1997 the IRS has allowed payments via credit and debit cards, but because they are not allowed to charge or collect fees for tax payments they outsource this service to three authorized payment providers: Pay1040, PayUSAtax, and ACI Payments. Each of the payment providers charges a fee for their service, ranging from 1.87% to 2%. Read the IRS page for more information about these options.
You can also make payments via Plastiq, which allows any bill to be paid with a credit card, but the fees are higher at 2.85%.
Is it worth it?
As you can see from the fees, Pay1040 offers the best rate at 1.87%. If you’re using a cashback credit card that earns 2%, you’re only profiting 0.13% on the transaction – or $6.50 on a $5,000 tax payment – which is hardly worth the effort. If using a card that earns transferable miles like the Capital One Venture X Rewards Credit Card you can do slightly better if you’re able to transfer those earned miles to another program for outsized value. Still, it hardly makes sense to do so for such small earnings.
That being said it does make sense to use a credit card, even with low returns, when you have a new card with a minimum spend requirement to meet. Say you just opened the Chase Sapphire Preferred(R) Card and need to spend $4,0000 in 3 months to get the Welcome Bonus. Paying your taxes will earn you 1 point per dollar with this card (which is almost always worth at least 1.5 cents/point when transferring) so the loss is minimal and you’re able to wipe out all or most of your minimum spend requirement to earn the bonus points. In this scenario, it is definitely worth using a credit card to pay your taxes if you do not think you will be able to meet the spend through regular usage – or maybe you opened the card specifically for this purpose, as I have done.
Visiting my favorite lounge with access provided by the American Express Platinum card. I met the hefty minimum spend on this card with an estimated tax payment.
Overpayment
What if you open multiple new credit cards throughout the year and want to meet the minimum spend requirements on them? Well, you can simply make an estimated payment via any of the aforementioned sites at various points during the year. While this is an easy way to knock off large spend requirements quickly, you’ll need to wait until you file your taxes to get the money back (if a refund is due) so you’re essentially giving the government a free loan until then. This may or may not be worth it to you depending on the expected refund amount.
It’s also important to note that each payment processor has a limit of two payments per year, so you could make a maximum of 6 estimated payments across all three companies plus an unlimited amount using Plastiq at a higher fee.
The Ultimate Hack
Though overpaying your taxes is a way to easily meet minimum spend on new credit cards, we’ve seen those minimums increase sharply in recent years and it is no longer rare to see requirements of $10,000 or more on cards like the American Express Platinum Card or Chase Ink Business Preferred(SM) Credit Card. With the strategy mentioned above, you may have to settle for not covering the entire minimum spend with an estimated payment, or overpaying and having to float thousands of dollars for months while waiting for the IRS to return it. Thankfully, there is one more trick you can use to make giant credit card payments to the IRS and get it back quickly.
I learned about this strategy from the Wealthy Accountant blog. In his words,
I want you to give your tax professional all your tax documents like you normally do. When she finishes your return tell her to file an extension instead. Anytime during the year you need a massive amount of extra spend to satisfy multiple new credit card bonus requirements you simply pay the IRS an estimated payment for the 4th quarter of the previous year. Call your accountant and inform them of the additional estimated tax paid. File the return ASAP and have your refund direct deposited. You should have your refund in a week or two, well before the credit card payments are due. There is no limit to the size of this type of spending. But it is limited to once a year. Who ever thought you would be so excited looking forward to preparing your taxes? (source)
Using this method, you could ostensibly meet the minimum spend on two, three, five, or a hundred credit cards with an unlimited amount of spend by making multiple Q4 estimated payments and then immediately filing your return to get the refund and pay off all the card balances – all while earning hundreds of thousands of points and miles in the process. In post-COVID times I would expect a longer delay in returning the refund, however by waiting until June after the bulk of refunds are processed it should be faster. YMMV.
Final Thoughts
Paying your taxes with a credit card is easy, but isn’t always worth it. If the aim is to make a profit, your time is better spent on other activities. However, if you have a minimum spend to meet on a credit card (or many), then it can be extremely lucrative and relatively low-cost to do so – especially if using the “ultimate hack” as explained by the Wealthy Accountant. I almost always open new credit cards around tax time and make payments to help meet the minimum spend and have enjoyed many free trips because of it. What about you?
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Filed extension and made a significant overpayment in Aug last year. Still floating all that money while the IRS takes it sweet time. Cannot reach a human at the IRS using any of the numbers I tried. Would strongly advise against large overpayments if you can’t float the amount for months.
Yes, last year was a nightmare for returns. Good recommendation not to charge more than you can afford to float!
If making an overpayment by card (to fulfill the initial spend requirement on a new card thus the best return) an initial lever to pull might be to take $5k and put it towards an extra $5k in ibonds if you’ve already maxed your $10k ibonds per person. At a current 7.12% that could be “something”. Again, like K mentioned make sure you can float that if necessary. :) Would this action be effective?
I’m not sure I fully understand your question, but I Bonds cannot be purchased with a credit card.
Overpaying your taxes by $5000 with a credit card, then taking the refund in the form of ibonds. Meet the minimum spend and gain access to 5k more allowable ibond space above the 10k per person currently allowed.
You’d have to run the math on your specific tax bill amount to find out if the arbitrage is worth it to get the extra ibonds AND when the break even point would be.
Ah, I see. Yes, that would work and could be an effective way to essentially buy I bonds with a credit card for a low-ish rate. It could certainly make sense with the current 7.12% interest rate, but that’s only guaranteed through the rest of April 2022 and so if it changes significantly after that it may not make sense. Good tip!
Sorry for the confusion in original post. Thanks for taking the time to comment and, more importantly, create the original content Brandon! Great stuff!
My pleasure!
The way I read it, the IRS limits estimated payments to two total payments per quarter which would be eight per year (no mention of a limit for payment providers). Maybe I’m overlooking it, is it stated on the website for the payment providers that you can only do two payments per year (not per quarter)? Just wanted to follow-up and be sure I understood. Thanks.
Yes, that’s what the site says but it’s actually enforced per payment processor and not the total number of payments. This Frequent Miler article concurs.
Maybe I missing something, credit card processor like pay1040 allow 2 payment of 1040-es per quarter. My understanding is we can at most open up to 2 cards each with large amount.
But you mentioned “multiple – hundreds of credit card” in the article.
“Using this method, you could ostensibly meet the minimum spend on two, three, five, or a hundred credit cards with an unlimited amount of spend by making multiple Q4 estimated payments”
Thanks you!
Yes, you are limited to two payments per processor but can make unlimited payments with Plastiq. They charge a higher fee, but if you need to meet the minimum spend on multiple cards and have maxed out your other options it’s a possibility.
Good rundown of where these options stand today.
Minor technical point: the article says YE and estimated Q1 tax payments are due April 15, 2022. I believe the date has been changed for this year, and they are actually due the following Monday, April 18.
Cheers, and thanks for the article.
You’re right, thanks! Fixed.