American Express offers a point-based rewards system called “Membership Rewards” to those qualify for and use their credit or charge cards. Points generally benefit only cardholders who pay their bill in full every month, so any accumulation of benefits does not first need to offset interest or late fee charges. With American Express, these points typically accrue at a rate of about one point for every dollar spent using a credit or charge card that participates in the program, but depending on the card and the merchandise, they sometimes accrue at a rate as low as one point for every two dollars.
The company is now offering a new redemption choice for those who have accumulated points through significant spending. You can use these points to pay all or part of your tax bill. The idea is grounded in some sense. Rather than using rewards to buy something else, contributing to unnecessary additional spending, American Express is suggesting using the points for something perhaps more responsible.
In order to use Membership Rewards points for paying taxes, you must use the services at either Pay1040.com or OfficialPayments.com. These websites do not offer tax filing services; they exist just to help taxpayers pay their due or overdue taxes after they have already filed the appropriate forms. While paying a tax bill by check or direct debit (ACH) is free, these services charge a fee determined as a percentage of your payment in return for the convenience of paying with a credit card or a debit card.
Since payment processors are not allowed by law to absorb the cost of accepting credit and debit cards, the convenience fee allows these companies to pass merchant card expenses to the taxpayer. Both companies charge 2.35% of the payment and the amount is subject to a minimum. Debit cards are processed with a flat $3.95 fee.
Through the above websites, paying $1 to the IRS or to your state or local governments costs 200 Membership Rewards points. This isn’t exactly a favorable exchange rate considering you’ll need to spend a minimum of about $400,000 on your card in order to use those points to pay off a $2,000 tax bill including the processing fee. Financially, you might be better off just converting your points to cash.
This reminds me of Taco Bell’s new Drive-Thru Diet. It’s good that American Express is offering some new options for using Membership Rewards points, but you should look at the cost and whether this is the most efficient use of your points. There are better options out there. After all negotiation and payment plan options with the IRS have been explored and exhausted, those who need to pay a tax bill via a credit card, like those who need to eat at Taco Bell, — this might be a worthwhile use of points.
What do you think?