I am hereby announcing that this year, I will pay my tax by credit card.
According to my estimate, I owe Uncle Sam ahywhere between $700 and $800 for the tax year 2004 thanks to my careful withholding planning. But with more than $30,000 burning a hole in my banking accounts, am I crazy to pay my tax bills by credit card, knowing I will be charged a "convenience fee"? Nope. And here is why.
Let's look at rules of the game first. For a 2.49% "convenience fee", two companies, Pay1040.com and Officialpayments.com, allows you to pay tax bills online with your credit card.
The bright side of it is your tax payment thru credit card will be treated as a purchase instead of cash advnace. For example, FAQ from Pay1040.com reads:
"6. Will I be charged a cash advance fee?
No, your tax payment will be treated like a retail purchase and not a cash advance."
This means you can accumulate your credit card rewards while paying your tax bill. Well, you might say that the rewards do not offset the 2.49% convenience fee, but arbitrage opportunity actually exists. Introducing Citi® Driver's Edge® Platinum Select® Card...
The killer feature of the Driver's Edge card is it offers 5% rebate on all purchases for the first 9 months (and 1% afterwards, with $500 annual cap), which can be used towards car purchase or service. The card is also without annual fee and offers 0% APR balance transfer for 12 months.
So, for $1,000 tax bill, one will pay $24.90 for convenience fee, but will get $50 in credit card rewards, for a net gain of $25.10. If that's not enough, you have the additional benefit of delaying your actual tax payment by a month by taking advantage of the credit card grace period.
Now, there is one more incentive to adjust your withholding next year.