This year American taxpayers have an option that never existed before: paying incomes taxes with a credit card. In 1997, Congress passed the Taxpayer Relief Act to grant the IRS authority to accept credit-card payments for personal federal income tax payments. After a comprehensive vendor-evaluation process, the IRS awarded California-based U S Audiotex a credit-card-processing agreement for the initial pilot. The pilot is now underway with MasterCard, American Express and Discover participating. (VISA has declined to participate at this time.)
To pay personal income taxes via a credit card, you simply dial 888/2PAY-TAX. You will then be connected to the U S Audiotex Interactive Voice Response system, prompting you to enter the pertinent information via the telephone keypad. A relatively painless process.
There is one catch though: a service charge !
While Congress gave the IRS authority to accept credit cards, it did not give the IRS the authority to absorb the merchant fees associated with credit card transactions. Therefore, the merchant fee, which averages about 2% on a typical transaction, is passed directly to the credit-card-paying-taxpayer in the form of a service charge. Most credit card companies prohibit charging consumers a service fee for credit card transactions. MasterCard, American Express and Discover waived this regulation for the IRS pilot. (VISA is sticking to its regulations for now.)
The current service fee is 2.5% of the transaction.
American taxpayers who end up owing taxes for 1998 generally owe about $2,000. Under the current program, paying this amount via a credit card will cost an additional $50.
Is this worth it?
For just the convenience it's hard to justify. However, if you have another agenda such as racking up extra air miles, earning additional rewards or chasing a great interest rate it could make a compelling case.
Most reward programs connected with MasterCard, American Express and Discover cards generally enable cardholders to earn back about 0.5% to 2.0% of the transaction. Paying a 2.5% cash service charge and receiving a 0.5% to 2.0% reward is hardly a compelling scenario. For example, if you charged $10,000 under the Discover card program you would earn $85 in cash back. Under the GE Rewards MasterCard a $10,000 transaction would earn $135 in cash back. The service fee for charging a $10,000 tax payment would be $250. This does not even come close to being a wash, let alone compelling.
There are exceptions though. For example, the General Motors MasterCard offers a 5.0% reward credit for each transaction. Charging a $10,000 tax payment would earn the cardholder a $500 credit towards the purchase or lease of a new GM car or truck. Not a bad return for paying a $250 service fee. If you intend to buy a new GM vehicle soon and owe some taxes you might want to consider this option of paying.
Unquestionably the best proposition is: Taxes for Air Miles. But it depends on how you redeem the air miles.
Most airline co-branded MasterCards offer one air mile for each dollar charged. The value of each air mile is about two to three cents. For example, airline programs generally require 25,000 miles for a free roundtrip domestic ticket in the US. A free domestic, cross-country ticket, which requires a Saturday night stayover, and a 7-day advance reservation, is currently worth between $600 and $850. Charging a $25,000 tax payment would require a $625 service fee. This a hardly a compelling trade-off.
However, if you redeem air miles for upgrades on international flights it is a very different proposition. Under this type of redemption the value of each air mile can reach 20 to 80 cents per mile! Consider the recent real-life example of a United Airlines Mileage Plus MasterCard cardholder. This cardholder purchased, in advance, a roundtrip United Airlines ticket from Washington, D.C. to London for $882. The cardholder then redeemed 20,000 air miles for a roundtrip upgrade to business class. If the cardholder had not upgraded with air miles, the cost of the business class seat would have been a whopping $5,300. Therefore, under this scenario, 20,000 air miles saved the cardholder $4,418. This means each air miles was worth 22 cents. If the cardholder had charged a $20,000 tax payment the service fee would have been $500. Spending $500 to save more than $4,000 is compelling.
But it gets better than this.
Since the United Airlines Mileage Plus MasterCard cardholder is automatically enrolled in United's frequent flyer program and did not purchase a totally free ticket, the cardholder still earns miles for the flight. The Washington, D.C. to London flight is about 7,500 miles roundtrip. So the net cost to the cardholder was $882 cash and 12,500 miles. The equates to a value of 35 cents per mile. Would you pay a $312.50 fee ($12,500 times 2.5%) to save $4,418?
But it gets even sweeter!
The cardholder is a frequent flyer with United Airlines at the Premier Executive level (minimum 50,000 miles flown per year). United Premier Executive members receive double air miles for each flight. So this cardholder will earn 15,000 miles for the flight. When all is said and done, the cardholder in this example paid $882 in cash and used up 5,000 net air miles in his account for a $5,300 business class seat. This nets out to a value of 88 cents per mile. In other words paying a $125 service fee and earning 5,000 air miles from a $5,000 tax payment would have saved the cardholder $4,418. This IS truly compelling!
There are doubtless other examples of credit card reward programs, that, under certain scenarios, produce a compelling case for charging income taxes. Weigh out the costs and benefits carefully. Maybe you'll get a free ride on Uncle Sam.
DEBIT CARD AIR MILES
Most U.S. banks have shied away from offering any type of reward for off-line debit cards such as VISA's Check Card and MasterCard's MasterMoney card. Unlike credit cards, banks do not earn interest directly from debit cards. Debit card revenues come primarily from merchant fees and perhaps a small cardholder fee. However one major issuer has decided to take the plunge by offering air miles for debit card use.
Chase Manhattan Bank and Continental Airlines have teamed up to offer the Chase/Continental Banking Card. Under the program cardholders will earn one Continental OnePass mile for every two dollars spent on purchases. Most credit card airline programs offer one mile for every dollar charged. Obviously Chase requires a checking account relationship for a consumer to be issued the Chase/Continental debit card. Chase offers a number of different checking account options, including a no fee account which requires maintaining a minimum balance of $3,000. When customers sign up for the new debit card, they will earn bonus miles, then additional bonus miles each year upon renewal of the card, for which the annual fee is $30. A great benefit of OnePass miles is that they never expire. The new debit card is available to anyone in the USA. The new debit card joins the Chase/Continental co-branded credit card, launched one year ago this month. The card, and further information, is available at any Chase branch, or by calling 1-800-CHASE24.
NOT-SO-BEST BANK
The FDIC decided this month to pull the plug on more than 400,000 BestBank VISA credit cards. However the FDIC indicated about 13,000 BestBank card accounts, mostly secured VISA cards, will remain open until a buyer is found. The card accounts to be closed were those involved in a travel club program. BestBank formerly offered a VISA card with a $600 credit line if the applicant agreed to charge $500 in dues for a related travel club. The cards were offered to all consumers including those with a poor credit history. The Colorado bank failed last July and was taken over by the FDIC after it was discovered that its credit card program caused the bank to become "severely undercapitalized". In its efforts to unload BestBanks' cards the FDIC sent out portfolio details to 132 interested parties and received a total of six bids. One deal was accepted and was set to close Jan 29. However, after two extensions, the FDIC decided last week to withdraw the portfolio from the marketplace. Civil lawsuits and a criminal investigation is still underway. The FDIC estimates total losses stemming from its takeover of BestBank and its sub-prime card portfolio will exceed $172 million.
MY VISA Internet credit card pioneer NextCard is making history again with the launch of a personalized VISA card called: My VISA. NextCard issues "The First True Internet VISA", which offers on-line approval in seconds. NextCard has enabled cardholders to "build" their VISA card online by the card with upgrades, valuable rewards and a favorite photo. Based on each applicant's unique credit profile, upgrades can range from a low interest rate (2.9% intro rate or 9.9% fixed) to a higher credit line. Cardholders can choose to earn up to Double Rewards for every dollar they spend on- line or off-line with a NextCard. Cardholders can also personalize their card by choosing from over 1,700 NextCard Gallery photos online, or by uploading a favorite digital image from their own computer. For more information visit NextCard at CardTrak Online (www.cardtrak.com).
