Paying Your Taxes with American Express Membership Rewards Points – Deal or No Deal?
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American Express recently announced that it was teaming up with two independent payment agencies to allow its cardholders to pay their federal, state or local taxes with Amex Membership Rewards points. On the surface, this sounds like a good use of points that might otherwise sit in your account for months or years before you get around to redeeming them. However, there is a potential downside to consider if you’re thinking of using this service.
I’ll explain the process in greater detail, but here’s the crux of the issue: If you pay your taxes with Membership Rewards points, you won’t only be paying your taxes, you’ll also be paying an extra 2.35% fee to cover what are essentially credit card processing costs. In other words, if you owe $1,000, you can pay with points, but you will be paying a bill that in actuality is now $1023.50.
To further complicate matters, you should understand that the redemption rate for Membership Rewards points on tax payments is 200 points per dollar — in general, the industry standard for points redemption is 100 points per dollar. For example…
You can redeem 2,500 Membership Rewards points for a $25 Home Depot gift card, but that same 2,500 points would only offset $12.50 in taxes. So you’re getting half the value from those points if you use them for tax payments compared to their value when used for other rewards.
Confused?
If you don’t understand why your tax bill goes up by 2.35% when you pay with points, a quick primer on the system American Express is using to offer the points-for-taxes deal will make it more clear. For a number of years, the Internal Revenue Service has allowed you to pay your taxes via credit card. However, by law, the IRS can not pay the processing fees that banks would charge if the government accepted your credit card directly.
Instead, the IRS outsources the credit card collection to authorized partner companies who can accept your credit card payment — for an additional fee to cover the credit card processing fees. In order to get the convenience of paying by credit card, you agree to pay a fee that is a percentage of the taxes you owe (see also You Can Pay Taxes By Credit Card; Here’s Why You Shouldn’t).
What American Express has done is to team up with two of these authorized government partners — Pay1040.com and OfficialPayments.com — in order to make Membership Rewards points one of the payment options when you use these services. In essence, you are paying your taxes by credit card — with the additional 2.35% fee — but you can offset or completely cover your taxes due with the points in your Membership Rewards account.
Deal or no deal?
You may see the reduced value of your points as a perfectly fine trade-off for the opportunity to use points instead of “real” money for tax payments. Or, you may choose to pay in a traditional way and get full value for your Membership Rewards points via gift cards or other rewards. Whatever you choose, it is worth knowing the pros and cons beforehand so you can make a sound decision.
Related: 0% Balance Transfer Credit Cards
Published on January 27th, 2010 - 6 Comments
Filed under: Credit Cards, Taxes
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6 Responses to “Paying Your Taxes with American Express Membership Rewards Points – Deal or No Deal?”
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January 27th, 2010 at 10:34 am
Interesting issue. One thing that puzzles me: If the U.S. government can get away with directly charging credit-card users the fee that card issuers charge for each transaction, why can’t merchants do the same?
As it is, we all pay extra for just about everything, because merchants who are now forced to accept credit cards if they want to stay in business pass the costs along to everyone by raising prices. If credit card users were charged the transaction fee, the rest of us might have lower costs. And I expect a lot of people would pay in cash, forestalling the epidemic of credit-card debt we’ve seen in this country.
January 27th, 2010 at 10:56 am
I think it’s an issue of semantics. The government is not directly accepting your credit card — the outside company is accepting your card and then forwarding the tax portion to the government. The outside company charges a fee for the service, which I am guessing covers the credit card transaction fee plus leaves a little left over to make the transaction profitable for them — they don’t call it a credit card fee, so it’s within the credit card companies’ rules.
The difference between this and how a merchant works is the fact that the merchant accepts both cash and credit, and is not allowed to charge credit customers more money. In the ultimate display of semantics, however, that same merchant CAN offer a discount to customers that pay in cash — for example, if the posted price is $5.00, a merchant could post that cash-paying customers would only be charged $4.90. Same difference, but credit card companies do not want merchants “penalizing” credit customers for using their cards — but they’re OK with rewarding cash customers. Silly, but that’s the deal.
January 27th, 2010 at 11:38 am
Adam: You see similar things (re: cash discounts) at gas stations. I agree that it’s a silly distinction. Seems like it should either be okay or not, instead of splitting hairs like this.
January 27th, 2010 at 3:38 pm
Adam, this is great. I knew that there were disadvantages for using rewards to directly pay for things (student loans, CC bills are other areas where you won’t get top dollar for your rewards) but I never had the facts so plainly painted out for me.
As you pointed out in your concluding paragraph as is the same with many if not all financial decisions being informed is the key. Great post!
January 27th, 2010 at 11:46 pm
Interesting… I personally have a bias against American Express… I had a horrible experience I won’t get into.
January 28th, 2010 at 9:21 am
Wow, what a horrible deal.
The 2% is the least of it, they first discount the points 50%?
If a friend told me they were doing this, I’d give them 90% of Home Depot value, as it might take some time to spend at that one store. But 50%?
I don’t know what else those points can be used for, but I’d stay clear of that card altogether, too complicated for a bad deal.
I have a Amex Open – 5% back at office supply stores 3% for gas. Don’t use it elsewhere.
A Fidelity affinity card thru MBNA which gives 2% cash into a 529 account. This is 4X what that Amex card offers.