Reducing Taxes by paying estimated taxes via Credit cards

In general I put everything on a credit card that has benefits and then just pay off the balance in full each month.  My current favorite card is the Citi Double Cash back card.  Essentially this card gives you a 2% discount off everything you buy.

 

Early on in my working career, I had not cared much about the taxes on interest and dividends, since my payroll tax withholdings have covered the small extra income without triggering the penalty of underpayment of taxes.  However the closer I have come to retirement the more important paying estimated taxes has become so that I don’t penalty of not paying enough taxes.

 

Taxes are actually due quarterly.  If the bulk of your income comes from investments, there isn’t someone else paying your quarterly taxes on your behalf (think employer) and you have to pay your estimated taxes.

 

For information on the estimated quarterly tax payments and dates they are due you can go here:

https://www.irs.gov/faqs/estimated-tax/individuals/individuals-2

 

So I have to pay quarterly estimated taxes on the income coming from dividends and interest.  In the past I had always paid by taking the money electronically directly out of my checking account.  Although they do offer an option to pay via credit card the “convenience fee” was always too high for it to makes sense to pay that way.

 

Well now with the Citi double back cash card I have started making estimated payments with that card.  With that I receive the following benefits.

 

The approved payment processors can be found here::

https://www.irs.gov/payments/pay-taxes-by-credit-or-debit-card

In particular Pay1040.com has a 1.87% fee when using a credit card.

 

You can pay your estimated taxes here:

https://www.pay1040.com/

 

So let’s say I have to make an estimated payment of $5000 per quarter.  The fee for using a credit card will be $93.50.  The nice thing is the cash back card will give you $100 in cash back which automatically saves you $6.50 per quarter.  The other nice thing is that you can charge it to the card and don’t have to pay for at least 30 days, and possibly nearly 60 days depending on when your closing statement date of the card is.  Son that $5000 can be sitting in a Money Market fund getting 2.1% interest (at the time of this writing) so you can get AT LEAST another $8 in interest while you are waiting for the credit card bill to come.

 

So by using the Citi double cash card I can “reduce” my bill by at least $15 per quarter or $60 per year by using this strategy.  Since I have to pay estimated taxes anyhow you might as well reduce your bill a bit by using a credit card.  It actually comes to a bit more than that, since I believe the last estimated payment you can hold off on and not do in January but pay it in April anyhow.

 

Hope this information helps.  Thanks.