Owing taxes is never fun, but for some taxpayers, that unavoidable bill can also unlock a surprisingly valuable upside — thousands of dollars’ worth of credit card rewards.
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Under the right circumstances, paying your federal, state or even local taxes with a credit card can help you earn a lucrative welcome bonus, often enough to cover flights, hotels or other major expenses. The key is knowing when this strategy makes sense and when it can backfire.
Here’s how to responsibly turn a tax payment into credit card rewards — and when to skip this strategy altogether.
When Paying Your Federal, State or Local Taxes by Credit Card Makes Sense
Before you even consider strategies for maximizing points, it’s important to determine if paying your taxes with a credit card is a smart strategy for your finances.
“We only recommend using a credit card to pay your taxes when you have a tax bill that you need to pay, and you are able to and would have paid in full via your bank account,” said Jimmy Yoon, principal and loyalty specialist at point.me.
If you’re planning to pay your tax bill in full anyway, using a credit card instead of a bank transfer can make sense. Unlike a checking account, a credit card payment can generate rewards — provided the math works in your favor.
It’s also not limited to federal taxes.
“You typically can also pay any local, county and state taxes with a credit card,” Yoon said.
However, fees matter.
“Depending on the tax authority, the credit card fee can be free — but also up to 3%,” Yoon said.
This strategy only makes sense if the value of the rewards outweighs the processing fee.
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How To Maximize Credit Card Rewards When Paying Your Tax Bill
The most effective way to earn outsized rewards from a tax payment is by using it to qualify for a new card welcome offer.
“There are welcome offers on credit cards that require as little as $500 in spend, so the tax bill doesn’t have to be large,” Yoon said. “Banks offer welcome offers to new cardholders as a way of enticing them to sign up for the card.”
Some current welcome offers reach as high as 200,000 points, which — depending on the issuer — can carry a minimum value of about $3,400 when redeemed strategically.
“If you have a really large tax bill in the five-figures or higher, it could be worth getting multiple cards for multiple welcome offers,” Yoon said. “Note that there are limits to the number of payments you can make, though.”
When Paying Your Taxes With a Credit Card Is a Bad Idea
Despite the appeal of earning points, this strategy isn’t right for everyone.
“Please do not pay your taxes with a credit card if you will not be paying the balance in full immediately after the transaction posts,” Yoon said. “The amount that you’d be paying in interest will quickly exceed the value in points you receive.”
Even if you plan to pay the bill right away, it may still not be worth it if the card doesn’t offer a meaningful bonus.
“Since a credit card transaction fee applies, you want to make sure that you get something worthwhile out of it,” he said.
There’s also a major timing consideration to keep in mind.
“If you’re looking to apply for a large loan — mortgages, especially — in the next few months or are in the middle of a mortgage process right now,” Yoon continued, “it’s not worth applying for a new credit card even with the points you can get, as you will want to keep your credit report clean.”
Paying your taxes with a credit card can be a powerful rewards strategy, but only when used carefully. For taxpayers who can pay in full, absorb the fees and qualify for a strong welcome offer, a tax bill can double as a gateway to valuable travel or cash-back rewards. For everyone else, the safest move is still the simplest one — pay your taxes without creating new debt.
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This article originally appeared on GOBankingRates.com: This Tax Payment Strategy Could Unlock Thousands in Credit Card Rewards
