Tip For Saving When Paying Taxes
Using a credit card to pay your taxes is becoming the norm. In fact, credit card and debit cards are already the most common payment method for taxes -- more people use them than those who electronically transfer from bank accounts. According to the IRS, the use of credit and debit cards to pay taxes increased 54% last year, and it's predicted to increase even further this year.
To further encourage those to pay their taxes with a credit card, credit card companies are going into advertising overdrive with campaigns specifically targeted to get people to pay their taxes with their credit card. This includes a Chase offering to double the mileage points on the United Mileage Plus SignatureVisa card for amounts paid toward taxes, plus a host of similar bonus offerings from other credit cards companies.
But while getting bonus rewards may at first sound appealing, when you look closely you'll find that these offers aren't nearly as good as they first sound.
The biggest problem is that when you pay your taxes by credit card, the charge comes with a 2.49% surcharge to third-party companies that process the transaction. Most people find this charge a surprise because processing surcharges are usually not allowed by credit card companies. This surcharge effectively wipes out any bonuses that the credit card companies offer and often means you'll lose money even with the added promotion incentives and if you pay off your credit card on time and in full. The financially smart move is to pay by another method if possible.
Comments
Why is it that these third-party companies can get away with a transaction fee in this case? I thought all such fees violated merchant agreements with credit card companies.
Sorry, it took me a bit to find out. It appears that the credit card companies modified their terms specifically for the government to allow the IRS to charge the fee, but no other industries were included in the modification.
It strictly prohibed for a merchant to charge a service fee although they can give discounts for cash transactions provided it is clearly disclosed to cardholders as a cash discount and the cash price is presented as a discount from the standard price available for all other means of payment.
I disagree. Paying just a few bucks to put a $500 tax bill on a credit card is well worth it to get 500+ miles. Now that's a deal! Furthermore, the surcharge cost is never a surprise.
If you owe more than $500, then paying a 2.49% surcharge is insane. If you don't owe a lot, than it's not a big deal. If you owe a lot, than it would not be a smart move to add that % on top of a credit card %.
The 2.49% is the same whether you pay $10 in taxes, $500 in taxes or even $10,000 in taxes - the amount you pay doesn't make a difference at all. The point you need to focus on is whether the ticket you will buy with those miles is worth more or less than $0.0249 a mile (see below).
I disagree. Paying just a few bucks to put a $500 tax bill on a credit card is well worth it to get 500+ miles. Now that’s a deal! Furthermore, the surcharge cost is never a surprise.
A lot depends on how you use your miles. $0.025 per mile is more than the airlines sell the miles to the credit card companies, but the true value of the miles depends on how you use them. For example, experts estimate that flying business class across the Atlantic has a market value of about $0.10 per mile. The truth is that most people don't get the best value for their miles and get roughly the worth that the credit card companies pay for them. And if the credit card amount isn't paid off in full right away, then it most definitely is not a deal.
Huh! What in the world are you talking about? Bottom line is I haven't had to pay for an airline ticket in years. It is implied that credit card balance is always paid in full. That's a no-brainer.
I haven't had to pay for an airline ticket in years either ;) But the only way that I would pay for miles (what you are suggesting with paying your taxes with a credit card) is if I could get the miles for less money than they are worth toward the purchase of a ticket. As I stated above, that depends on the particular ticket you buy with them. If you redeem them wisely and get the most value from them (like a business class ticket across the Atlantic), then it can be a good deal. If you redeem them like the average person does for any old ticket, then it probably isn't a good deal.
Look at it this way. If you have to use 10,000 miles to purchase a ticket that is worth $100, then each mile is worth $0.01. If you can get a ticket that normally costs $300 for 10,000 miles, then each mile is worth $0.03. It depends on the ticket you purchase whether paying $0.025 per mile is a good deal or not.
For me, the ticket that I usually get with the miles costs 60,000. I can get the ticket at a discount broker for approximately $700. That means each of my miles is worth $0.012 - it doesn't make sense for me to pay $0.025 when each mile is only worth $0.012 to me. You have to figure it out if it is worth it for the ticket you will be purchasing.
Jeffrey Strain: You must be an accountant. Good thinking! :)
No, I'm not an accountant, but I have learned that it's common to think you're saving money when you really aren't. It's an easy mistake to make and I bet if someone came up to most people and said, I'll give 500 miles for $12.50 the vast majority would take it thinking it was a good deal. The reason for this is that we are trained that 1 mile is $1 (what we get) and not what that mile is actually worth. The truth is that if you are good at finding discount airline tickets and don't travel business class, then it doesn't usually make sense to pay for miles.
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