by Lyle Daly | Feb. 25, 2021
The Ascent is reader-supported: we may earn a commission from offers on this page. It’s how we make money. But our editorial integrity ensures our experts’ opinions aren’t influenced by compensation. Terms may apply to offers listed on this page.
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.
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:
Here's a closer look at how each of these credit cards can make you money on your taxes.
The easiest option is the Citi® Double Cash Card – 18 month BT offer. It doesn't have an annual fee, and it earns up to 2% back on every purchase. 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.
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 Ultimate Rewards travel portal. The best way to understand how this works is with an example:
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.
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 every purchase. And the Bank of America® Premium Rewards® credit card, which earns 1.5 points per $1 on all 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:
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.
If you have credit card debt, transferring it to this top balance transfer card can allow you to pay 0% interest for a whopping 18 months! That’s one reason our experts rate this card as a top pick to help get control of your debt. It’ll allow you to pay 0% interest on both balance transfers and new purchases until late 2022, and you’ll pay no annual fee. Read The Ascent's full review for free and apply in just 2 minutes.
We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.
The Ascent is a Motley Fool service that rates and reviews essential products for your everyday money matters.
Copyright © 2018 - 2021 The Ascent. All rights reserved.