How I Make Money Paying Taxes With a Credit Card

High rewards rates make it possible to pay your tax bill with a credit card and still come out ahead.

Conventional wisdom says you shouldn't pay your taxes with a credit card. Every payment processor charges a credit card processing fee of just under 2%. On the other hand, bank account transfers are free and debit card payments only cost a few dollars.

I, however, pay my taxes with my credit card every year, and I make a little money in the process -- even with that processing fee. If you want to do the same, all it takes is knowing which credit cards to use.

Credit cards that can make you money on your taxes

The tax payment processor with the lowest credit card fee is PayUSAtax, which charges 1.96% (with a $2.69 minimum).

There aren't, of course, any credit cards that earn bonus rewards on tax payments. So, to make money paying your taxes, you need a card that earns over 1.96% on regular purchases.

That's hard to find, but a few of the top rewards credit cards fit the bill:

• Citi Double Cash® Card. Can get up to 2% back on tax payments.
• Chase Freedom Unlimited®. Can get up to 2.25% back on tax payments when combined with the Chase Sapphire Reserve®.
• Bank of America® Travel Rewards credit card and Bank of America® Premium Rewards® credit card. Can get up to 2.625% back on tax payments depending on your status in the Bank of America Preferred Rewards program.

Here's a closer look at how each of these credit cards can make you money on your taxes.

Citi Double Cash® Card

The easiest option is the Citi Double Cash® Card. It doesn't have an annual fee, and it earns up to 2% back on purchases. That 2% back is split into two parts: 1% back when you make a purchase, plus 1% more when you pay your credit card bill on time. You only need to make a minimum payment to get the second half of your cash back.

You won't earn much on your taxes, but you will at least recoup the processing fee and a bit more. Just make sure you pay your credit card bill by the due date to get the full 2% back.

Chase Freedom Unlimited®

I prefer to pay taxes with the Chase Freedom Unlimited®. This no-annual-fee card has several bonus categories, and it also earns 1.5% back on non-bonus spending. That's not enough on its own, but you can boost the value of your Chase Ultimate Rewards points if you have a Chase travel card.

In my case, I have the Chase Sapphire Reserve®. It offers a 50% bonus if you use points to book travel through the Chase Travel portal. The best way to understand how this works is with an example:

1. You pay $1,000 in taxes with the Chase Freedom Unlimited®. You earn 150 Chase points (worth $15) in rewards and pay a $19.60 processing fee.
2. You transfer those 150 points to your Chase Sapphire Reserve®.
3. You redeem those points through the Chase travel portal. With the 50% bonus, your 150 points are worth $22.50.

Note that the Chase Sapphire Reserve® carries a $550 annual fee. As such, you wouldn't want to get it solely to pay your taxes. But this method is perfect if you already have both of those Chase credit cards or have been thinking about getting them.

Bank of America rewards credit cards

There are two Bank of America credit cards that can get you money back on your taxes. The Bank of America® Travel Rewards credit card, which has no annual fee, earns 1.5 points per $1 on purchases. And the Bank of America® Premium Rewards® credit card, which earns 1.5 points per $1 on eligible non-bonus spending. It has a $95 annual fee, as well as several additional benefits.

Once again, 1.5% alone won't outweigh the credit card processing fee. That's where the Bank of America Preferred Rewards program can help. Clients who meet qualifying combined balance minimums in Bank of America banking and Merrill Lynch investing accounts receive a variety of extras including bonus credit card rewards.

These are the program's status tiers, their balance requirements, and their rewards bonuses:

• Gold: Requires $20,000 in balances; 25% credit card rewards bonus
• Platinum: Requires $50,000 in balances; 50% credit card rewards bonus
• Platinum Honors: Requires $100,000 in balances; 75% credit card rewards bonus

If your Bank of America balance is high enough to qualify for the Platinum or Platinum Honors tiers, the additional rewards will push you well over the 1.96% processing fee.

You'd earn 2.25% on your taxes as a Platinum client or 2.625% as a Platinum Honors client.

Purchase rewards aren't the only way you can make money on your taxes with a credit card. Another option is to use your tax payment to reach the spending requirement on a sign-up bonus. Plenty of the best sign-up bonuses are worth much more than you'd pay in credit card processing fees.

I like being able to cover the fee without relying on bonuses. Any of the methods above will earn enough rewards on your payment to outweigh the fees. Just keep in mind that you also need to pay your credit card bill in full afterwards so you don't incur any interest charges. It's only when you avoid interest that you truly come out ahead with credit card rewards.