The smart way to turn your tax bill into travel rewards

Reading Time: 5 min

April 15th — tax day — is a day we (unfortunately) know all too well.

Of course, it's always fun to get money back from Uncle Sam. But for those that owe taxes, you might be wondering if it makes sense to use your credit card to pay the bill and earn travel rewards in the process.

Well, like many things in the points and miles world, it depends. Paying your taxes with a credit card isn't free, as there are fees associated with it. But in certain situations, the rewards might just make it worthwhile. How? Let's take a look at the details.

The IRS doesn't take a credit card as a form of payment directly. But there are two third-party payment processing companies that are officially authorized by the IRS to collect federal taxes paid with a credit card.

One of these companies, Pay1040, currently charges a fee of 1.75% when using a consumer Mastercard or Visa to pay taxes. However, if you use a business card or any American Express card, you'll pay a significantly higher fee of 2.89%.

The second company, ACI Payments, Inc., charges a slightly higher 1.85% fee right now, but it covers all consumer and business credit cards. That makes it a better option when using an American Express or business credit card. However, you may find that ACI won't accept a business card to pay your personal taxes.

Let's say you owe $10,000 to the IRS. At a 1.75% fee, paying that bill with a personal credit card will cost you $175. That's not a small amount. But if you use the right card, you could potentially earn even more from your rewards.

In this case, the best opportunity to come out ahead is to use a personal card that earn rewards valued at more than 1.75 cents for every dollar you spend.

Unfortunately, this eliminates most airline credit cards. You'll typically only earn 1 point or mile for every dollar you spend on these cards, and the points aren't worth 1.75 cents each.

In fact, according to our Points Path valuations, even the most valuable airline miles — Alaska Mileage Plan miles — are only worth 1.45 cents apiece.

Fortunately, there are other credit cards that earn as much as 2% on everything you buy, which can make a 1.75% fee worth paying.

For instance, the Capital One Venture Rewards Credit Card earns 2 miles per dollar on every purchase you make. So if you were to pay a $10,000 tax bill with that card, you'd earn 20,000 Capital One miles.

Those miles can than be used to erase any travel purchase you charge to the card at 1 cent per mile, meaning 20,000 miles would be worth $200. So while paying a $10,000 tax bill with the Capital One Venture will cost $175, you'll ultimately earn a minimum of $200 in rewards.

But if you transfer your Capital One miles to one of the bank's airline or hotel partners, you could get even more than 1 cent per mile. That means there's a lot of potential upside to earning miles this way.

Other credit cards that make sense when paying your taxes include the Citi Double Cash® Card and the Wells Fargo Active Cash Card. Both cards earn 2% cash back on every purchase, so you're guaranteed to come out at least slightly ahead.

And depending on how you value Chase points, the Chase Freedom Unlimited® Credit Card can also be a great option when paired with a premium Chase credit card. You'll earn 1.5 points per dollar with the Freedom Unlimited, and can get at least 1.25 cents per point in value for them when booking travel.

Pro tip: You can also use multiple credit cards to pay your taxes. Each of the two payment processors will accept two payments, meaning you can make a total of four payments with your return.

While ideally you'll earn more in rewards than the fee for paying your taxes with a card, even when you don't, there can be some other worthwhile reasons to put the bill on a card.

For starters, if you have a hefty tax bill and not quite enough funds in your bank account to pay it by the April 15th deadline, paying via credit card can buy you a few extra weeks to cover what you owe, so long as you can pay your credit card in full by the statement due date.

Or, if you have a credit card with a 0% introductory interest rate, you can pay your bill over multiple months without paying any extra interest. Just make sure you pay down the entire debt before the introductory rate expires, since regular credit card interest rates are extremely high.

Spending a lot of money on a credit card can also sometimes unlock special benefits. For example, with the World of Hyatt Credit Card, you'll get a Category 1-4 free night certificate if you spend $15,000 in a calendar year, along with additional nights toward elite status.

So while you'd be paying a fee to charge your taxes to your card, the extra perks could be worth the tradeoff.

Or, if there's a large sign-up bonus offer on a new credit card, but the minimum spending requirement is high, using a credit card to pay your tax bill can help. In this case, even paying a nominal fee might be worth it if you're earning a lot of points from the bonus for doing so.

Paying taxes with your credit card isn't for everyone. But for those who have a card that will actually earn more in rewards than the processing fees, it's a great option.

And if you're looking to pay your tax bill with a new credit card that comes with a big sign-up bonus, there's still time to apply and get the card before the April 15th deadline. Just make sure the value you're getting from the bonus is worth the fee.