Should I Pay Taxes With My Bonus Credit Card?
If you owe the tax office in April, you are probably in no rush to pay your taxes. And if you owe a lot, you might even consider paying your tax bills with a credit card to earn a nice reward. Not so fast, there are a few things to consider first.
If you are in debt, you can face fines.
Let’s get one thing out of the way. Unless you have a standard employer who withholds money from your paycheck each year, and you are self-employed, or a freelancer, or independent contractor, you need to pay your estimated quarterly taxes for the year .
If you owe the IRS thousands for not paying these taxes, you are most likely paying fines.
The amount varies depending on your taxable income and is small, but it is still worth noting. Credit card rewards or not, you should definitely pay taxes for the next year to avoid these penalties. Alternatively, you may want to consider using a credit card to make these settlement payments (one of which is due in April).
Whether you have a large tax bill from an alleged payment or simply because you haven’t paid for a year, you might consider putting those thousands on your credit card. After all, why not get the awards?
Before going down this route, make sure you actually have the money to pay off your credit card. If you don’t have the money to pay taxes, a credit card is a terrible financing option because their interest rates are usually well over 10%. You will have better luck setting up a payment plan with the IRS.
Also, you want to calculate whether using the card will pay off.
Convenience fee versus. Your money back rate
Before you even think about using a credit card, keep one thing in mind: convenience fees.
The IRS doesn’t just let you use your credit card for free. He contracts with various companies to collect payments on your credit card, and they charge fees ranging from 1.87% to 2% . This means that if you really want to be rewarded with your credit card, there must be a more than 2% money back offer on that card. And most cards don’t. Of course, 5% cashback can be returned on some cards, but this applies to certain categories, such as food or gasoline. No taxes.
Many cards offer up to 1.5% or 2%, but this means that you are likely to break even or earn very little. For example, let’s say your tax bill is $ 3,000. With a 1.87% credit card commission, you pay $ 3056. But listen, you have a fancy 2% money back card, so you make $ 61, right?
Well, subtract that from the commission and you have a whopping $ 5.
I mean, I think every little thing matters, but that’s not cause for concern .
Your tax account can help you get your sign up bonus
One case where paying your tax bill with a credit card can be profitable is when you use your credit card signup bonus.
Some cards offer big bonuses just for card registration. The trick, of course, is that you have to spend thousands over a period of time to get this bonus. However, you can use an expensive tax bill to reach this threshold. As Credit.com explains :
Here’s an example: The Chase Sapphire Preferred Card … offers a signup bonus of 50,000 points if you spend $ 4,000 in the first three months. So let’s say you have a tax bill of $ 5,000. With commission included, you spent $ 5,093.50 and you have 55,093 points. If you cash out your points, you will earn $ 550.93 and your profit is $ 457.43. Not bad for a bill you should have paid anyway. (It’s worth noting that this particular card has a $ 95 annual fee that is not charged for the first year.)
There is of course a big caveat. If you cannot afford to pay the full amount, the reward does not matter. You end up paying ridiculously high interest rates (Preferred has a variable annual interest rate of 16.49% to 23.49%) to renew the balance, making the reward meaningless.
Again, if you cannot afford to pay your tax bill, a credit card is not the best option. This is a dangerous debt trap that can hold you back for a long time. However, if you can afford to pay the bill and are just trying to take advantage of the reward, paying by card might be worth it. Cashback will not bring you much, but the bonus can be a profitable move.