In recent years, taxpayers have had the option of mitigating the pain of discharging their IRS and other tax obligations by earning frequent flyer miles for their payments.
How? By charging their tax payments to one of the ubiquitous airline- or hotel-affiliated credit cards, which typically award one mile for every dollar spent.
How it works
It comes as a welcome surprise to many consumers that tax payments can be charged to a credit card.
Indeed, the IRS is expressly prohibited from paying the “merchant fees” normally incurred by payees in credit card transactions, so the IRS cannot itself accept credit card payments. To circumvent the restriction, the IRS since 1999 has contracted with third-party companies to act as intermediaries, authorizing them to accept credit card payments on their behalf.
So, taxpayers make credit card payments for their tax bill (or a part thereof) to one of the authorized payment processors, and that company in turn pays the IRS. But instead of passing along the merchant fee to the IRS, the processor charges the taxpayer a 2.49 percent “convenience fee.”
For tax year 2002, taxpayers have a choice of two IRS-authorized services: Official Payments (877-754-4413) or Link2Gov (888-658-5465). Official Payments accepts IRS payments—plus payments for a wide range of other state and local taxes—by phone or over the Internet at their website. Payments can be charged to American Express, Discover, MasterCard, or Visa cards. Link2Gov also accepts American Express, Discover, MasterCard, and Visa, but only processes Federal income tax payments. Incidentally, you can use your card to pay someone else’s tax bill, not just your own.
If this roundabout procedure strikes you as somehow shady or dubious, rest assured that the IRS fully endorses these alternative payment options. The topic is treated explicitly on the IRS website.
Should you pay taxes with a credit card?
Having established that you can earn miles for tax payments, the follow-up question is: Should you? There are two key factors to consider: cost and convenience.
On the cost side, since you normally earn one mile for each dollar charged, the aforementioned convenience fee amounts to paying 2.5 cents per mile earned.
At that rate, to earn the 25,000 miles required for a free award ticket in most programs, you’d pay off a $25,000 tax bill, incurring a $623 convenience fee. Since you could probably purchase a ticket for considerably less than $623, you would arguably be overpaying for the miles. On the other hand, if you already had 24,000 miles in your account and just needed an extra 1,000 miles to qualify for a free ticket, the $25 fee might be acceptable.
As far as convenience goes, if you can afford to pay the tax bill on time, there’s not much convenience to speak of. If you simply can’t afford to pay your tax bill in full by the filing deadline, the ability to pay off your taxes over time could be a selling point. But be sure to compare the credit card interest rates with loan rates and any IRS late fees, which might apply.
Promotions can change the value equation
As cautioned above, the combination of the 2.49 percent convenience fee and the standard earning rate of one mile for every dollar charged results in a questionable value proposition. But there are limited-time promotions currently on offer through two major airline programs, which effectively reduce the cost of the miles by half.
Specifically, Delta and United are both offering double miles for federal tax payments charged to credit cards linked to their respective programs. So instead of 2.5 cents, you would be paying 1.25 cents per mile.
For more information on the Delta and United offers, see the SmarterTravel.com summary.
Other miles-for-taxes opportunities
While the credit card option can be iffy from a return-on-investment standpoint, there’s another mileage-earning opportunity—new for the 2002 tax year—that is a slam-dunk.
H&R Block, the McDonald’s of tax preparation services, is now a mileage-awarding partner in the programs of America West, Best Western, and Six Continents.
America West FlightFund members who have their taxes prepared by H&R Block for the first time will earn 500 FlightFund miles when completing a tax return using H&R Block’s online tax-preparation service; 1,000 miles for filing a tax return at a regular H&R Block tax office; or 2,000 miles for tax returns filed at a premium H&R Block tax office.
Best Western Gold Crown Club International members can earn 200 points at participating retail H&R Block Tax Offices for first-time clients and 75 points for existing clients. Or, earn 75 points for using Block’s online tax-preparation service, whether you’re a new or existing client.
And members of Six Continents’ Priority Club will earn 1,500 Priority Club points as a new H&R Block retail client, 500 points as a returning H&R Block retail client, and 500 points for using Block’s online tax-preparation service.
Unlike the credit card offers, miles earned for having taxes prepared are essentially free, assuming you would have used an H&R service, or equivalent, anyway. And that should take some of the sting out of a painful tax bill.