What follows is not tax advice, but miles and points advice. I’ve given advice on earning miles for Lasik in the past, but that did not make me an eye surgeon.
Paying Taxes with a Credit Card is Expensive.
PayUSATax.com charges a 1.89% for credit card payments and a $3.49 flat fee for debit transactions.
Pay1040.com charges a $2.99 flat fee for debit transactions.
These are the two services I’ve used. Many other services charge higher fees — close to 3% even for credit card transactions.
Contra some conventional wisdom, most people cannot deduct the fees for making their tax payments, as they would need to claim miscellaneous deductions of more than 2% of adjusted gross income in order to do so. This is rare.
When Paying Taxes By Credit Card Makes Sense
The United Club Card earns 1.5 points per dollar on all spending. If you value United miles at 1.8 cents apiece then you’re getting 2.7% back and paying 1.9% for the privilege… that’s a profit of 0.8% on the tax payments you’re making.
I value Starwood Starpoints a wee bit over 2 cents apiece, so charging taxes and yielding a 2%+ rebate at a cost of 1.9% makes somewhat marginal sense.
Generally, though, paying taxes by credit cards would only make sense either to:
- Meet minimum spend requirements on a card (that is, when there’s a big bonus in play)
- Earn benefits on top of points, such as how the Hilton Reserve card from Citibank gives you top tier Diamond status in the Hilton HHonors program after $40,000 spend in a year. Other hotel and airline cards may give you a boost towards status based on your spending. (Delta and United will require minimum ticket spending for elite status starting next year, but waive the requirement for those putting at least $25,000 on a co-brand credit card.)
The Economics of Paying Taxes by Debit Card Work Out Much Better
Since you can make tax transactions for a $2.99 or $3.49 flat fee, whatever you can earn off of a debit card will usually make more sense than paying taxes via credit card with their high (1.9% or higher) fees.
But there aren’t a ton of rewarding debit card options.
- There are still mileage-earning debit cards from Bank of America floating around, but their terms and conditions preclude earning miles from tax payments.
- UFB Direct offers American Airlines miles for debit transactions — but it’s just 1 mile per 2 dollars of spending, with a limit of $1500 per transaction (so just 750 miles).
- You can load free Bluebird cards with Vanilla Reload cards purchased via credit card. American Express markets this as a comprehensive online account, rather than a prepaid card though it fulfills those functions as well. Since you can use the Bluebird card to pay off your credit card that was used to buy the Reload cards, or transfer funds to your bank account, there’s no reason to use the funds towards taxes — in fact doing so gives up any miles you’d earn through other methods.
The reason mileage-earning debit options are limited is that the Durbin Amendment to the Dodd Frank financial reform law signed in 2010 limits the cost to merchants of debit cards. Banks don’t earn very much any more off of debit card transactions, so it doesn’t make sense to ‘pay’ consumers to make those transactions. In fact, buying miles costs the banks more than the fees they earn. So mileage-earning debit cards are almost a thing of the past.
How to Earn Miles for Debit Card Tax Payments with the Suntrust Delta Debit Card
Suntrust Bank issues the Delta Skymiles World Check Card and offers 1 Delta mile per dollar spent.
Suntrust will let anyone open an account online, but they seem to shut accounts down for many people who do not live in their business areas of Alabama, Arkansas, Florida, Georgia, Missouri, Mississippi, North Carolina, South Carlona, Tennessee, West Virginia, Virginia, and Washington DC only. Suntrust is strong in the South and Mid-Atlantic.
Frequent Miler, who doesn’t live in a Suntrust state, had his account closed after initiating a $7000 funds transfer. I’ve seen that large funds transfers initiated from a Suntrust account that’s just been opened seem to raise flags.
There’s a 5000 mile signup bonus and a $75 per year annual fee. You need to keep a $3000 average balance in the account to avoid monthly fees.
You can pay up to $35,000 in a single debit transaction with Suntrust, and up to $35,000 per day. It’s Delta miles, but it’s a whole lot of Delta miles.
I’ve been using the Suntrust Delta debit card successfully for about the past year without incident, and I do not use the account for anything other than tax payments.
If You Can’t List Your Address in a Suntrust State, There are Other Ways to Make Taxpay Debit Transactions
Visa/Mastercard Gift Cards
Visa and Mastercard gift cards can now have PIN numbers assigned, and can be used as debit cards.
So if you buy these at office supply stores using a Chase Ink Plus card or Chase Ink Bold card, you can earn 5 points per dollar and then you use those cards to pay your taxes — say the card costs $5 and the tax payment $3 you are earning 1000 points even from a $200 gift card at a ‘cost’ of 0.8 cents per point. The downside is that you are making small denomination tax payments, so you have to make a whole bunch of tax payments if your balance due is large.
MyVanilla Debit cards (I discussed cash advances off these cards back in January) allows debit transactions up to $5000 at a cost of 50 cents per transaction (in addition to the $2.99+ to process tax payments via an online service).
Folks that have built up large balances (up to $9999) on these cards, pulled money out via cash advance, and rinsed and repeated have had their cards shut down — which means funds frozen for a time before getting their cash out.
But I haven’t heard stories of problems actually using MyVanilla as a debit card for tax payments.
This is a good strategy for folks who have access to plenty of Vanilla Reload cards, max out their $5000 per month on Bluebird, and are looking for a place to put additional cards and then liquidate.
If You Do Quarterly Tax Deposits, How Do You Make the Most of Them?
(Note that credit cards in this post offer credit to me if you’re approved using my links. The opinions, analyses, and evaluations here are mine. The content is not provided or commissioned by American Express, by Chase, by Citibank, US Bank, Bank of America, Barclays or any other company. They have not reviewed, approved or endorsed what I have to say.)
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