So the worst has happened after calculating your tax return: you owe money in taxes this year. Is there a way to make lemonade out of the grand experience of forking over a big chunk of cash? How about racking up some rewards points or travel miles on one of those rewards credit cards? Well, it isn't quite that simple.
At MyBankTracker.com, we love credit card mileage and other rewards points, but we also believe that it doesn't make any sense to spend a lot of money for too little reward. The good news is that you can pay a tax bill with a credit card, but the downside is that the associated fees can be substantial.
None of what follows is a solid replacement for meeting with a qualified tax planner with ample experience in managing debt and personal finances, but the information will help you ask better questions along the quest to save money and get more out of the finance tools you have.
Rates are as follows:
- They start at 1.87 percent for payments by mail
- Can go as high as 3.93 percent for e-filing, but
- The average is about 2.35 to 2.50 percent in either case.
- At 2.35 percent, you'll pay23.50 for every1,000 owed.
- In addition, each service charges a handling fee of2-3, so it is important to crunch some numbers and decide if it is worthwhile.
Do the math, but weight the goals
Since it costs money to pay with a credit card, it's important to do the math to see if the gain in rewards points or mileage bonuses offsets those charges. However, there are other reasons that are perhaps less tangible in terms of dollars that might make paying taxes on the rewards card a smart idea.
Will the amount paid in taxes and fees push you over a spending threshold and into a higher rewards bracket? Will the extra spending bump you into any other bonus category? If so, then the associated perks might be worth spending a few extra dollars. All of these factors depend on the terms of your card, so it is important to look at the terms closely.
Now for another caveat. You need to know how the bank that issues your credit card will treat the expenditure. Will it be treated like any other purchase, or will it fall into the category of a cash advance? Cash advance terms are usually more costly in the long term, because the interest is usually higher, and the non-cash advance principle needs to be paid off before your monthly payments are applied to the cash advance balance. This means you are paying the higher interest rate for longer on a cash advance. Other associated fees may also be incurred.
Credit card convenience checks
Credit card convenience checks might be an option to pay your taxes, earn points, and skip the fees paid to third-party credit card processing services, but may come with the same additional fees and balance principle problems as cash advances, or worse. Know the terms before signing on the dotted line as every bank manages this differently for different cards and accounts. Read your user agreement carefully and call the bank to clarify. Ask for the details in writing in case you don't have the most up-to-date terms.
Know your payment habits
None of what has been written above takes credit card interest rates into account, and assumes the debt incurred from the tax payment will be paid off in full during the billing cycle to avoid accruing interest. If the debt can't be paid off right away and the interest is high, considering other options might be a good idea. Perks aren't worth much if the cost exceeds their value.
Shirley Pulawski is a freelance journalist who frequently contributes to MyBankTracker.com.
You might want to think twice about getting that schmear. In New York City, bagels that are sliced or prepared are subject to sales tax, whereas whole bagels are not, according to the Wall Street Journal.
If you live in Durham, North Carolina, you could be paying a tax on Rover. The state charges a $10 tax for neutered and spayed pets and $75 for pets that are not neutered or spayed, according to Turbo Tax.
In Illinois, all candies are subject to an extra tax, unless they contain flour, like the Whopper pictured here.
By the time you're 100, you've paid enough in taxes, at least according to the state of New Mexico, where people over 100 years old are tax-exempt.
If it's yellow, let it mellow could be the motto of some Maryland and Virginia residents looking to save money. In these two states there's a tax on flushing the toilet, according to Bing.
Tennessee anonymously collects a tax on illegal drugs, according to NPR. In 2006, the state collected $1.5 million from the tax.
Adult diapers are exempt from sales tax in Connecticut, but if you're buying diapers for your kids you'll have to pay taxes on those, according to Thomson Reuters.
Colorado levies a tax on "non essential" food packaging items, according to Business Insider. That means you'll pay a tax on paper cup lids and napkins, but not on paper cups themselves.
Businesses in Utah that employ nude or partly nude workers are required to pay a 10 percent sales tax, according to U.S. News and World Report.
If you buy cards in Alabama you'll pay a 10 cent tax on the deck, according to Turbo Tax. Meanwhile, Nevada gives free decks in exchange for completed returns.
In Texas, holiday-themed pictures that are meant to be placed on walls are taxed, according to efile.com.
In Arkansas, there's a 6 percent sales tax on tattoos, according to Turbo Tax.
New York has a tax on litigation, according to ABC News.
In Kansas, you have to pay taxes on that hot air balloon ride -- or risk flying away. In that state tethered balloons are taxed, but those that roam free are not because they are considered a legitimate form of transportation, according to ABC.
Another reason not to buy your fruit from a vending machine. Fresh fruit is exempt from sales tax in California, unless it's sold from a vending machine, according to U.S. News and World Report.
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