August 6, 2013
This is the fourth post in a series dedicated to analyzing options for earning points and other rewards when paying federal taxes. If you haven’t already, please review the earlier posts:
- Buying miles and points from the IRS: debit cards
- Buying miles and points and cash from the IRS with credit cards
- Buying perks and points from the IRS with credit cards
In posts outlined above, I concluded the following:
- Using a debit card that offers miles for debit purchases can be a great deal since the cost per point will be extremely low (especially for large tax payments).
- You can earn a small profit by paying with a 2% cash back (or better) credit card.
- Using a points or miles earning credit card (especially one that offers bonus points for big spend) can be an inexpensive way to buy points or miles, but you should be sure that you’ll use the points or miles for high value redemptions before you invest in them.
- Another good option is to use a credit card that offers perks for high spend such as elite status, free hotel nights, or companion passes. Keep in mind, though, that all of these potential perks have one thing in common: they are worth nothing unless you use them.
Suppose you want to pay taxes with your credit card in order to earn lots of points and perks, but you’re not thrilled with the prospect of paying almost 2% in credit card processing fees. Another option is to use your credit card to buy gift cards and then use those gift cards to pay taxes.
There are two types of gift cards to consider for this approach: American Express gift cards, and Visa/MasterCard gift cards. Each can save you money when paying taxes, but for different reasons. In this post, I’ll detail how to save money by purchasing and using American Express gift cards.
American Express gift cards
At the time of this writing, the cash back portal TopCashBack is offering 2% cash back for purchases made in the American Express Gift Card store (as long as you start by clicking through from TopCashBack). You can find signup links for TopCashBack (and many other free to join programs) here.
The goal of buying Amex gift cards through a cash back portal is to earn enough cash back to partially or fully cover the transaction fees associated with paying taxes with a credit card. The current best rate for paying taxes with an American Express credit card is 1.89% through PayUSAtax.com. So, it looks like you could make a slight profit by doing the following:
- Buy Amex gift cards via TopCashBack for 2% profit.
- Pay taxes with Amex gift cards with 1.89% fee.
- Earn small profit overall.
That’s what it looks like. The devil is in the details…
The painful details
Earning a profit by buying and using Amex gift cards is harder than you might think. Here are a number of issues that you may face:
Cashback payout: One issue is that people have had mixed success in getting cash back through TopCashBack when buying Amex gift cards. Between February 18 and March 13, 2013, in particular, there were technical issues that prevented these transactions from tracking correctly. Personally, I’ve never had any problems, but I’ve also only bought these gift cards through TopCashBack a couple of times. Note that even if the purchase tracks and pays out correctly, it can still take 3 or 4 months before the cash is actually paid to you.
Fees: Another issue is that, due to fees, you probably won’t make a 2% profit when buying these cards. Each gift card usually has a $3.95 fee, and there is an additional charge for shipping. There are often codes available to waive card fees or reduce shipping charges, but these come and go all the time, and there is always a chance that one of these codes will invalidate your cash back. If you have recently used a discount code and have still received cash back, please help out others by posting details in the comments below.
Low value gift cards: A third problem is that when you first click through to American Express, you will only be shown gift cards with very low total values (most top out at $200). If you do not find a way to buy these gift cards with waived fees, then each card’s $3.95 fee will eat up your 2% rebate from TopCashBack. Also, trying to pay large tax bills with a pile of $200 Amex gift cards would surely be an extremely unpleasant experience. Luckily, there is a simple workaround to this issue. It is still possible to buy $3,000 personalized Amex gift cards and quite a few readers have reported that cash back is awarded for these purchase. For details on how to buy these gift cards, please see “Amex takes away $3K cash back gift cards.”
Cancelled orders: It is common to place an order for Amex gift cards only to be told later that the order couldn’t be processed. The message may say “Your order was not fulfilled for the following reasons: We could not verify the information you provided.” Sometimes the reason may be that you exceeded some purchase limits. For personal gift cards, the Amex web site says “Your purchase can total up to $5,000.” And, for business gift cards the site says “Your purchase can total up to $75,000.” These statements seem pretty clear. What’s not clear is that there seem to be limits not just within a single transaction, but over time as well. For details, please see the contents and comments of this post: “Learning Amex gift card rules the hard way.”
Cash advance fees: If your credit card company treats online gift card purchases as cash advances, then don’t do this! The only bank I’m sure of that does this is Citibank. With Chase and Amex you should be fine. I don’t have personal experience with other banks, though. If you’re unsure, you can protect yourself by calling your bank and asking them to reduce or eliminate your cash advance limit before you order Amex gift cards.
Financial review: Some people who have ordered large amounts of gift cards from American Express, and have used Amex credit cards to pay, have suffered through American Express financial reviews. This means that American Express freezes all of your Amex card accounts and requests documentation (such as tax forms) to prove to them that you are able to sustain such high levels of spend (and to pay it back). Regardless of whether the financial review satisfies American Express, its probably an event that you would prefer to avoid. So, just note that as a caution before you buy too many gift cards!
Assuming you made it undeterred through the gauntlet of issues detailed above, let’s take a look at how much profit one can make from buying Amex gift cards. Suppose you buy $5000 of personal Amex gift cards. Let’s also assume worst-case that you have no valid coupon codes to reduce expenses and that you have not enrolled in Amex’s Premium Shipping Plan. In that case, you could buy two $2500 gift cards at a time and pay $3.95 each in fees and $9.95 each for shipping:
- Purchase: two $2,500 Amex gift cards
- Fees: ($3.95 + $9.95) x 2 = $27.80
- Cash back: 2% of $5000 = $100
- Profit: $72.20 = 1.44%
1.44% profit is not 2%, but it’s still pretty good. And, this is assuming the worst case scenario of having no discount codes and no shipping plan to reduce expenses. Of course, this does assume that you will get the promised 2% cash back, but be aware that there is always a risk with online shopping portals that purchases will not track correctly.
Now that you have earned a 1.44% profit from buy Amex gift cards, you could then use those gift cards to pay taxes via PayUSAtax.com. The profit from TopCashBack won’t completely eliminate the 1.89% tax payment fee, but it will be close.
Keep in mind that your gift card will have to have a large enough balance to cover the processing fees. So, you can’t really make a $2500 tax payment with a $2500 gift card. Instead, do the math as follows:
- Fee = 1.89%
- Card value = $2500
- Max Payment Amount = $2500 / 1.0189 = $2453.63
If you are paying quarterly estimated taxes, you can make up to two payments per quarter online. So, with two $2500 Amex gift cards the totals will be as follows:
- Total Payment Amount: $2453.63 x 2 = $4907.26
- Total tax payment fees: $5000 – $4907.26 = $92.74
- Total “loss”: $92.74 – $72.20 (TopCashBack profit) = $20.54
- Loss as percent of tax payments: $20.54 / $4907.26 = .4%
If you want to make more than two $2500 payments, try calling PayUSAtax.com to see if they can process more than two over the phone.
Is it worth it?
With a .4% loss in paying taxes this way, you can make a profit with virtually any rewards credit card. Even a lowly 1% cash back card would result in a .6% profit. And, you can do much better by using one of the credit cards highlighted in my earlier tax payment posts (Buying miles and points and cash from the IRS with credit cards and Buying perks and points from the IRS with credit cards).
So, financially it looks like a win, but there are other factors to consider. First and foremost, is it worth your time to deal with all of the headaches associated with buying and using American Express gift cards? Personally, I’ve come to realize that the answer, for me, is no. I just don’t want to spend so much of my time dealing with these gift cards. If the Amex gift card headaches don’t bother you, you should also consider whether you have better options for using or cashing out Amex gift cards than by paying 1.89% in tax fees. Between Amazon Payments, reload cards, and gift cards with PINs, its not too hard to dream up good alternatives.
By using the right credit card to pay, and by maximizing cash back opportunities, it is possible to do well by paying taxes with Amex gift cards. That said, this approach probably has more complications and potential snafus than most of us are willing to deal with. And, those that are willing to cross the hurdles are likely to find even more profitable uses for Amex gift cards than tax payments.