Taxes aren’t due this year until April 17 but already readers are asking: Should I pay my taxes with my credit card? Or better yet, a rewards credit card?
I’m all for maximizing cash back, miles, or points, but if you pay your taxes with a credit card, you have to pay a convenience fee, which varies by service provider. For example, if you e-file through Turbo Tax, you’ll pay a 2.49% fee.
[Related Article: 6 Hot Credit Card Trends for 2012]
Let’s take a look at the numbers and see if it makes sense:
Example 1: You owe $1,000 in taxes and you get 1% on your rewards card. You’ll have to pay $24.90 for the convenience of using a credit card. You only get $10 in rewards, so this is a no-brainer, right? It doesn’t make sense to use a rewards card. You’d need to get 3% in rewards to make a mere profit of $5.10.
Example 2: You owe $4,000 in taxes and you get 1% on your rewards card. You’ll have to pay a convenience fee of $99.60. You only get $40 in rewards, so this still doesn’t work. You’d need 3% in rewards to make a profit of $20.40.
[Free Resource: The Best Credit Cards in America: Student and Secured Cards]
As your tax bill goes up, the convenience fee goes up. On most credit cards, paying your taxes would fall under “1% on everything else.” So unless you have a truly elite card with high rewards “on everything else,” paying your taxes to get the rewards doesn’t work out in your favor.
Now, you can deduct the convenience fee as a miscellaneous expense on Form 1040, Schedule A. But the deduction is subject to the 2% limit on Form 1040, Schedule A (see Publication 529). This means that your miscellaneous expenses (this category includes job expenses, tax preparation fees, and other expenses, such as safe deposit box fees) have to exceed 2% of your adjusted gross income.
If you really have to use a credit card to pay your taxes, consult with a professional tax preparer to make sure you take this deduction if applicable.
[Credit Cards: 8 Credit Score Myths Debunked]