Maximizing Credit Card Rewards for Tax Payments
For savvy credit card users, paying taxes with plastic can be an opportunity to earn lucrative rewards and meet spending requirements for new card bonuses. However, it’s crucial to understand the fees involved and do the math to ensure the rewards outweigh the costs. This strategy works best for those who can pay their balances in full each month to avoid interest charges that negate any rewards earned.
Using New Card Sign-up Bonuses
One of the best ways to leverage tax payments is by working towards the minimum spending requirement for a new credit card’s sign-up bonus. Many popular travel rewards cards offer generous bonuses worth $500 or more after meeting a minimum spend of $3,000-$4,000 within the first 3 months. By putting your tax bill on these new cards, you can meet the spending threshold and unlock valuable rewards.
For example, the Chase Sapphire Preferred® Card currently offers 60,000 bonus points worth $750 in travel after spending $4,000 in the first 3 months. Paying your $4,000 tax bill with this card could help you earn the full bonus.
The Ink Business Preferred® Credit Card is another lucrative option, offering 100,000 bonus points worth $1,000 cash back after spending $15,000 in the first 3 months. While a high spending requirement, using it to pay quarterly estimated taxes could make it more attainable.
Earning Category Bonuses
Beyond sign-up bonuses, certain credit cards offer bonus rewards in categories like travel, dining, or gas. By paying taxes with cards that bonus these categories, you can earn an accelerated rewards rate on your tax payments.
The Chase Sapphire Reserve® earns 3X points on travel and dining purchases, so paying income taxes coded as “travel” could net a 4.5% rewards return based on point valuations. Similarly, the American Express® Gold Card earns 4X Membership Rewards points at restaurants, making it a good option if your tax payments qualify under that category.
Splitting Payments Across Multiple Cards
With high tax bills, you may need to split payments across multiple credit cards to maximize your earnings potential. This allows you to work towards the minimum spend on new cards while putting some charges on cards with the best category bonuses.
Just be mindful of each card’s credit limit. You can split the total payment amount across multiple cards, even if the individual charges exceed the limit on each card.
Comparing Fees vs Rewards Earned
While earning rewards is appealing, it’s important to weigh the credit card processing fees against the value of rewards earned. The IRS’ authorized payment processors charge fees ranging from 1.85% to 1.98% for credit card payments.
As a simple example, if you earn 2% cash back paying $5,000 in taxes, you’d receive $100 in rewards value. However, with a 1.98% fee ($99), your net “profit” is only $1. This makes sense for a lucrative new card bonus, but may not be worthwhile for earning standard rewards alone.
The math can become more favorable when factoring in category bonuses or point valuations for premium travel cards. Paying with the Sapphire Reserve and earning 3X points could yield over $250 in travel rewards on a $5,000 tax bill, easily justifying the fees.
Ultimately, running the specific numbers for your situation is crucial before pursuing this strategy. There’s no point in paying fees that outweigh the potential rewards.
Utilizing Payment Platforms
Expanding Payment Flexibility
Third-party payment platforms like Plastiq can expand the types of bills you can pay with a credit card, even if the recipient doesn’t accept credit cards directly. With Plastiq, you can use a credit card to pay expenses like rent, tuition, mortgage payments, business supplier invoices and more.
While convenient, these services charge fees around 2.5% to 2.9% to facilitate the payments. So similar math is required to determine if rewards rates and new card bonuses offset these higher fees.
Installment Plan Options
For larger tax bills you may struggle to pay upfront, services like Plastiq offer the option to break it into smaller installment payments. This can improve short-term cash flow management, allowing you to pay over time with a credit card.
Of course, this approach only makes sense if you can pay the full tax bill before incurring interest charges on your credit card. The installment fees from Plastiq get added on top of the processing fees for using a credit card.
Avoiding Costly Mistakes
While earning rewards for tax payments can be lucrative, there are some key pitfalls to avoid that could quickly negate any benefits or profits.
Paying Balances in Full
The golden rule of this strategy is to pay all credit card balances in full each month before the due date. Revolving a balance and incurring interest charges at a 15-25% APR will rapidly diminish any rewards earned and lead to a net loss.
If there’s any chance you cannot pay off the charges in full, it’s best to avoid putting tax payments on credit cards and incur unnecessary interest fees.
Monitoring Credit Utilization
Putting large tax payments on credit cards can cause a spike in your credit utilization ratio, which is the percentage of total credit you’re using across all cards. This ratio impacts about 30% of your credit score calculation, so a high utilization could temporarily drop your score.
To mitigate this, you can split payments across multiple cards to keep each card’s individual utilization lower. Or simply pay off the charges before your statement closing date, which is when issuers report balances to the credit bureaus.
Analyzing the Math
As emphasized throughout, it’s crucial to run the numbers for your specific situation before attempting to earn rewards on tax payments. The costs of processing fees combined with interest charges (if revolving a balance) need to be weighed against potential rewards earned.
There’s no one-size-fits-all answer, as it depends on factors like:
- Credit card rewards rates and annual fees
- Processing fees charged by payment processors
- Your ability to pay balances in full
- Potential new card bonuses and spending thresholds
If the math shows the rewards outweigh the costs based on your spending patterns and payment capabilities, then pursuing this strategy could make sense. But if the fees and interest charges exceed the value of rewards, it’s better to make tax payments through other channels.
Maximizing Savings on Tax Payments
While earning rewards is appealing, the primary goal for most taxpayers is minimizing costs and fees associated with tax payments. Here are some tips to keep more money in your pocket:
Use Debit Cards or Bank Accounts: The IRS and its payment processors don’t charge any fees for debit card or electronic bank payments. If you don’t need to earn rewards, these no-fee options are best.
Pay With a No-Annual-Fee Card: If putting taxes on a credit card, use a no-annual-fee card to avoid paying unnecessary annual fees that cut into your rewards earnings.
Explore Tax Payment Plans: The IRS offers short-term payment plans that break down larger bills into manageable installments without fees. This can improve cash flow if you can’t pay upfront.
Contribute to Tax-Advantaged Accounts: Reducing taxable income by contributing to 401(k), IRA, HSA and other tax-advantaged accounts can lower your overall tax liability.
Claim All Deductions and Credits: Ensure you’re taking advantage of all available deductions and tax credits you qualify for to reduce taxes owed.
By combining rewards strategies with other money-saving tactics, you can optimize the payment process and keep more money for yourself or in savings accounts earning interest.
The Environmental Impact of Plastic Taxes
While this article focuses on maximizing rewards from credit card payments, it’s important to address the growing push for taxes and fees on single-use plastics to combat environmental pollution.
In February 2024, the OECD released a report examining how taxes could reduce plastic waste by incentivizing sustainable practices. It found that well-designed taxes targeting the most polluting plastic products can be effective at reducing waste while raising revenues for environmental initiatives.
The report recommends targeting virgin plastics used for single-use items like packaging, containers, and bags. It suggests exempting plastics for essential uses like medical products to avoid negative impacts.
In the U.S., proposals like the REDUCE Act have called for an excise tax starting at $0.10 per pound on virgin plastic resin, increasing over time. Estimates suggest this could raise $120 billion over 10 years to fund waste management and recycling programs.
However, the plastics industry argues such taxes are regressive, increasing costs on everyday products that low-income households rely on. They advocate for investment in recycling infrastructure and waste management instead of taxes that could drive manufacturing overseas.
As consumers, we may soon face higher costs for single-use plastic items as governments explore environmental tax policies. While an important issue, it underscores the need to be strategic with credit card rewards to offset rising costs on common purchases.
The Future of Plastic Credits and Offsets
Looking ahead, new “plastic credit” markets are emerging that allow companies to offset their plastic footprints, similar to carbon offset programs. Firms like Plastic Bank and rePurpose Global facilitate these credits by funding plastic collection and recycling efforts in developing nations.
While a noble cause, there are concerns that plastic credits could allow companies to continue unsustainable production of virgin plastic rather than reducing consumption at the source. Experts emphasize credits should supplement – not replace – efforts to reduce plastic use through reusable packaging, redesigned products and tapping into recycled plastic supply chains.
As both consumers and businesses, we have a responsibility to make environmentally conscious decisions regarding our use and disposal of plastics. Earning rewards is appealing, but should be balanced with sustainable practices.
By strategically using credit cards for tax payments, splitting payments across multiple cards, and taking advantage of new card bonuses, savvy taxpayers can boost their savings and earn valuable rewards. However, it’s crucial to avoid costly mistakes like incurring interest charges and high fees that negate the benefits.
Ultimately, maximizing rewards requires diligent math, planning, and prioritizing environmental responsibility. As policies evolve, we must adapt our strategies accordingly while doing our part to reduce plastic waste for a cleaner future.