How I Paid Taxes With a Credit Card and Came Out Ahead
My 2020 tax bill was $4,200. Because I was going through a divorce at the time, I simply didn’t have the money to pay that bill all at once. So I decided to peek into 0% intro APR credit cards to see how I could finance the bill.
Once I ran the numbers, I decided to go for it. I applied for the Capital One Savor Rewards Card and was approved immediately. When I received the card, I used it to pay the entire tax bill. Below is how the charges appeared on my credit card statement:
The fee to pay my taxes using a credit card was $82, but the numbers worked in my favor.
Start With the Sign-Up Bonus
First, I was able to earn the sign-up bonus since my tax bill was well over the spending requirement. You get a $200 cash bonus after you spend $500 in the first three months of card membership. It is a solid sign-up bonus for a no-annual-fee cash back credit card. Additionally, I earned 1% cash back on the entire $4,282.32, which is nearly $43.
So with a $243 bonus for paying with a credit card, minus the $82 fee incurred from the servicer, I walked away with $161 in profit. And this profit is tax-free as credit card rewards are not taxable.
Take Advantage of 0% Intro APR Offer
While the profit is nice, the main reason I paid with the Capital One SavorOne Cash Rewards Credit Card is to take advantage of the 0% intro APR offer. I’m able to carry the balance month-to-month without incurring any interest, as long as I pay the minimum payment. And for the duration of the 15 months, I have been paying down the balance to where I may not need to transfer the remaining balance.
Use a Balance Transfer Card if Needed
Since I was regularly paying off the balance, I may not need to transfer it. But if I do need to apply for a balance transfer credit card, I’m thinking of applying for the Wells Fargo Active Cash as it has an extended balance transfer and valuable welcome offers. By doing this, I continue extending how long I can pay the balance off, and the numbers will once again work in my favor.
Let’s say I need to transfer the remaining $2,000 balance to the card. I will incur a 3% balance transfer fee, which will equate to $60. But with the $200 cash bonus, after spending $500 in the first three months, I will come out ahead again by $140.
However, paying with a credit card isn’t a long-term solution, but as inflation continues at a 40-year high, it is prudent for me (and maybe you too) to continue investing for the future and hold debt that costs nothing.
What to Know Before You Start Paying With a Credit Card
As you start to pay your taxes with a credit card, you might want to consider these factors — such as your credit score, available servicers and rewards — before you do.
How Paying by Card Can Impact Your Credit Score
It’s worth noting that holding a balance on a 0% APR credit card can negatively impact your credit score, especially if the card has a lower credit limit.
For example, my Capital One SavorOne card has a $10,000 credit line, meaning that I used roughly 40% of my available credit to pay my taxes. I noticed a slight decrease in my credit score, but nothing to be overly concerned over. It is generally recommended to keep your credit utilization under 30%.
Additionally, a large increase in credit usage could send your credit score down a few points.
So if you’re approved for a new card or have a card in mind to use, be sure that the credit line is larger than your tax bill. It isn’t advised to max out your credit card, and if you need more credit, give your issuer a call to see if they can extend your credit limit.
Understanding the Different Servicers Available to Pay With
When you receive your tax bill and decide to pay with a debit or credit card, you can choose between three different servicers: ACI Payments, Pay1040 or payUSAtax. Each of these is approved by the IRS and charges different fees.
Pay1040 currently offers the lowest fee for paying taxes with a credit card at 1.87%.
Knowing What Rewards Is Worth The Fee
In my case, I was chasing the sign-up bonus to help offset the fee of paying taxes with a credit card. But for someone who wants to earn more rewards, or meet a high spending requirement for a welcome offer, incurring a small fee may be worth it.
However, be sure to run the numbers on the rewards you earn versus the fee you incur. For example, if you enjoy earning American Express Membership Rewards points to redeem for first-class flights, the small fee may be worth it — especially if you value Amex rewards over 1.8 cents per point.
Going Electronically May Be the Way to Go
Tax season is right around the corner, and it’s looking to be a hairy tax season. As the IRS struggles with employees being out sick due to Covid-19 and other logistical issues, there is more reason to handle your payments electronically rather than through snail mail.
And if you need some flexibility or simply want to earn rewards for paying your taxes, consider paying your taxes using a credit card this tax season.
Assistant Professor of Accounting at Meredith College, School of Business
What are the benefits of paying taxes with a credit card?
When one pays taxes with a credit card, this can do one of two things: a) extend the deadline for paying them off for another 30 days, or b) extend the deadline for paying toward the tax bill, with likely high interest, for a longer period of time.
In what ways does paying with a credit card affect your credit score?
Paying for things with a credit card may or may not affect your credit as much as one might think. For those fiscally responsible, paying for daily and monthly expenditures and paying off the credit card as it comes due does not have time to affect their credit score in most cases. However, if a person continuously uses the credit allowed to them via a credit card that doesn’t keep the balance paid off and therefore, the amount of credit used continually rises, this person then begins to utilize more of their allowed credit with debt; this will negatively affect your credit score due to your debt ratio increasing (i.e., you have less credit available and more of your purchases or assets are financed with debt).
The best solution is to keep your debt (including taxes) paid off (without paying with a credit card). Many financial advisors suggest using a debit card as opposed to a credit card; this way, it hurts more when you make purchases because it’s similar to paying with cash, and you're less likely to "overspend" (i.e., spend more than you would normally or purchase things that you don’t need, etc.).
About Brett Holzhauer
Brett Holzhauer is a personal finance reporter. He has written for several leading publications and is mentioned in many others, including Forbes Advisor, Lending Tree, CNBC and ValuePenguin. An alum of the Walter Cronkite School of Journalism at Arizona State, when he is not reporting, Brett is likely scuba diving, golfing or watching college football. He tweets regularly at @brett_holzhauer.