Moana Surfrider Hotel, Oahu, Hawaii
Disclosure: This post contains affiliate links. If you click on a link and make a purchase, we will receive a commission at no additional cost to you.
It’s that time of year again, when households across the land are excited to fill out their tax forms. Yeah for Tax Day!
Goal #1 is of course to minimize tax burden using the numerous options available. Be sure to contribute to those deductible IRAs and 401ks!
Some households will have a zero or even negative tax burden, but most will have a tax obligation for the year. This is usually paid at least in part through paycheck withholding or estimated tax payments.
This is also the case for us since we pay Self-Employment tax on blog income. (But… plans are in motion to reduce/eliminate this.)
And I don’t know about you, but if I have to pay some taxes…. I at least better get a ridiculously cheap☆ trip to Hawaii out of the deal.
A Free Trip to Hawaii
Have you been to Hawaii? It’s nice. We had our second honeymoon in Oahu many moons ago, with free flights and free hotel. Breakfast on the ocean view terrace was also included. (Our first honeymoon was also fun. And free.)
We took the bus to Hanauma Bay to snorkel (and swam with a sea turtle!), enjoyed the pool and beach, and ate a ton of Japanese food and seafood. We even managed to have brunch with one of my favorite early retirement experts, Nords.
Moana Surfrider Hotel Pool
There are certainly worse places to spend a holiday. I am definitely ready to spend some time on the beach after a few months in a big city (We are currently in Taipei.)
Rewards Points
Back in those days I was traveling often for work. This became increasingly less enjoyable, but it did provide for a healthy number of airline and hotel points. Alas, those points are all gone…
Nowadays we accumulate airline and hotel points the old fashioned way, through credit card signup bonuses and strategic use of credit cards. At present, we are sitting on a nice pile of Ultimate Rewards Points ($3,414.39 worth, to be precise.)
The vast majority of these points were earned from signup bonuses, obtained using Estimated Tax payments in order to meet the Minimum Spending requirements.
The remainder is just from using credit cards where they earn the most. On each Uber ride we get 3 UR points and 1 SPG point per $1 spent, for example. Plus I never have to find parking.
Paying Taxes on Credit Cards
It probably goes without saying, but if money is tight and it seems the only option to pay the IRS is with a credit card… then that is a terrible option. It would be better to work with the IRS on a payment plan and/or tax relief.
But when the choice is between pay taxes with cash and not go to Hawaii, or pay with a new credit card or two and get some beach time… well, then there is really no choice at all.
The IRS currently has 3 payment providers that can process credit card payments. I have only used Pay1040 because they are the cheapest (1.87%.)
It is possible to make 2 payments with credit cards per year, but in theory this means two per year per payment processor (x3.) Or five times that if you also make estimated quarterly payments. There is no shortage of opportunity.
An example
During tax season last year I applied for the American Express Starwood Preferred Guest card, which paid 35,000 SPG points after $3,000 spend in the first 3 months (now 25,000 SPG points, I believe.) I met that requirement in one tax payment.
If I were more interested in precision I could have charged $2,944.94. With the 1.87% service fee the total bill would then be $3,000.01. In any case, $56.10 seemed like a reasonable price to pay for 5 hotel nights.
Even better, since I’m paying business taxes the service fee is a tax deduction. This effectively reduces my real cost to 1.32% or $39.75.
For W2 employees, tax related expenses are only deductible if you Itemize (Schedule A) and total expenses exceed 2% of AGI. We’re only talking a difference of $16.35 here, but it is a nice perk for anybody with a profitable blog or other side hustle.
Step-by-step guide to free☆ trips from tax payments
1. Estimate total tax burden (TurboTax Taxcaster is a good free tool.)
2. Ensure tax payments are required in April. Reduce W4 withholding to minimum required (equal to last years’ tax burden, unless significant life change.) TurboTax has a free W4 calculator.
(If anybody is uncomfortable with adjusting W4 and total withholding, you can just pay extra on a credit card to get the bonus and then get a bigger refund.)
3. Plan a destination and apply for credit cards that get you there.
Example: A married couple could get to Hawaii from the West Coast starting with just two Alaska Airlines cards (1 each) and two IHG cards (1 each.) Total minimum spend $4k.
4. Use an IRS authorized payment provider to process tax payment. Attached screenshot shows setup.
Tax payment on Pay1040.com
5. Say hello to the sea turtles
☆ Because of the credit card processing fee, we don’t get a “free” trip… rather we get a ridiculously cheap one. If only “ridiculously cheap” would fit in the header.
Summary
Ensuring you owe at tax time provides the option of paying the final tax bill with a credit card. Combined with a new credit card or two and a generous signup bonus, instead of just paying our taxes… we can get a bonus trip to the beach. Aloha Uncle Sam!
The examples discussed above are specifically for Federal Tax payments, but this strategy works equally well with State Tax and Property Tax payments. Check payment options with your State and local governments.
There are still a few months remaining before Tax Day, plenty of time to plan a holiday.
Some ideas for good cards to get started:
| Great travel card! card_name - bonus_miles_full annual_fees This is a great card for travelers! | |
| card_name - bonus_miles_full 2X miles on every purchase. Learn more here. | |
| card_name bonus_miles_full. *Rates and Fees. Numerous credits - Up to $200 in Uber Cash. $200 hotel credit with two-night minimum stay. $240 media credit. All as statement credits. (enrollment required) annual_fees. Terms Apply. | |
| card_name Small Business card. bonus_miles_full. Worth $1,250+. 3x points on travel (on the first $150,000 spent in combined purchases) annual_fees. |
If you do decide to load up on Rewards points this tax season, this blog earns a commission if you apply for credit cards through our affiliate links. It is certainly appreciated if you do, but definitely not expected. Happy Tax Day! And happy travels.
Related: See how we saved $10,000 on our 4 month tour of Western Europe.
Wow, great strategy! I didn’t realize you could pay taxes with credit cards and never thought of using this as a strategy to get to the minimum spend points on reward card offers. You just keep coming up with great tax tips! Thanks!
Happy travels! :)
With the perks you are trying to achieve by signing up for credit cards that offer points or miles if a certain amount is charged to them over a certain number of months, do you have a lot of credit cards at this point and isn’t that not good? To do thos you then have cards sitting there also not bring used after their initial benefit is earned and used…no?
We do have a lot of credit cards. Sometimes we close them (strategically.)
We are currently at an all-inclusive resort in Mexico and were talking with another family. They mentioned their $6,000 vacation… ours cost less than half of that and we are here longer. I don’t see any downsides.
“(But… plans are in motion to reduce/eliminate this.)”
Do tell?
Stay tuned…
Thanks for all the details here Jeremy! It’s the “kick in the pants” I needed to get busy with more travel hacking. We will likely owe a few thousand at tax time – so I need to look at new card options. And I just paid about $4,000 in property taxes which would have been a good minimum spend. I get hung up on the fees at times – and don’t consider all the benefits of the “ridiculously” cheap travel I should be considering. We can both get 3 or 4 cards now (even trying to stay in Chase’s 5/24 rule) because we haven’t hacked in a couple of years. We have more taxes (village/city) coming in May and college bills to pay in July – so we can be strategic and get some really cheap travel if I play it right.
Sounds like you have a lot of easy opportunities for getting tons of points in the near future.
I love your blog so much, and the layout and design change is great.
I’ve gotten into credit card points recently as well, and am sitting on a pretty nice stash of free travel currency. The learning an earning process was fun and profitable, too :)
I’m sure you know this but your UR may have much greater value than $3,414 if you convert first to one of the Ultimate Reward 1 for 1 travel partners. For example, you can elect to convert first to British Airways, or United, and then they use their rewards structure if it works out to better value. In my case I’ve found much better value for the flights I need through United.
Unrelated question: I have begun researching this and will continue, but maybe you know off the top of your head, so I’ll ask-
Do you know if it’s possible to create a new IRA and make a contribution after end of prior calendar year, but before filing?
The quirky detail I’m after is the question of creating a new IRA, rather than contributing to an existing one. Vanguard says the answer is yes, no problem. A few other less credible sources are mildly in conflict- I have not found a specific answer from the IRS yet. The sole goal of this would be to take advantage of Saver’s Credit to offset schedule C profits.
Please keep blogging! Would love to hear your thoughts on the ACA FIRE developments.
You can always open a new IRA. Contributions just need to be made by Tax Day.
You should still qualify for the saver’s credit by contributing to an existing IRA.
Nice moves, and nice stash of UR points! We applied for a reserve card right before they changed the sign up bonus and are waiting to pay our property tax bill until we find out if we got it. There is a fee to pay with CC but if we get 100k points it will be worth it.
I just spent most of my UR points on our all inclusive trip to Jamaica. We are going for 9 days and got everything including flights using only travel rewards and vouchers :)
Awesome! All inclusive is great since you don’t even have to pay for food or drinks, so you are even increasing savings by going on vacation.
Absolutely amazing how you guys do it. We’re not big travelers so we don’t engage in all the hacks to get around. We’re also stuck mostly in one spot because our daughter is in school and we’re not the home schooling type. Not that there’s anything wrong with it. I actually think it’s great. I just don’t think we’d be great at it. We went to Disney last year and definitely didn’t go for free. I should take more notes from you guys!
Many of the rewards points can be exchanged for cash and/or gift cards if you prefer… or a trip to Disneyland.
I never thought of that. I always see the 1 percent fee and revert to cash. But your right if I get two percent back from he card it’s worth it, especially if I get a small business tax deduction out of it.
And if it’s a signup bonus, it’s effectively way more than a 2% back. if you have a standard 50k point signup bonus on a 3,000 spend and you assume each point is only one cent that’s about a 17% cash back.
Don’t you get in trouble with the irs if you don’t withhold a buch during the year and owe too much at tax time?
Yes, but not if you paid at least what you owed last year.
If anybody is uncomfortable with adjusting W4 and total withholding, you can just pay extra on a credit card to get the bonus and then get a bigger refund.
Can you clarify this point? So, as long as I pay my full tax burden by tax time each year, I can adjust my W4 to have little to no fed taxes taken out of my paychecks throughout the year?
The IRS wants money at least quarterly. If you pay zero for 3/4 of the year and then a lump sum just before tax time, you will be penalized.
If you owed $12k in tax last year, and you contribute $3k/quarter in any form, you should be fine. This works even if you owe much more than $12k (last year’s tax burden.) This could be a combination of paycheck withholding and voluntary estimated tax payments each quarter.
You could also just overpay and then get a refund.
Or you could reduce your wage withholding and pay taxes quarterly – with a new CC each time!
We pay the IRS in April every year. This year I’m going to get something out of it. I wonder if I could use CC rewards to build a Pavlovian response that results in me actually looking forward to tax time. Thanks Jeremy!
Sounds better than excess salivation.
Thanks for the shout-out, Jeremy– my friend still remembers that Wailana Cafe meal with you & Winnie.
Tax returns and Hawaii photos in January: well played, sir!
My pleasure, Doug. Thanks for all of your help!
Hopefully we can do a reunion brunch one day.
Speaking of tax hacks, I have one for you. I have 5 kids. Withheld $0 in fedreral taxes during the year. Almost maxed out EITC + additional child tax credit for 2016.
Gross Income: ~$80k
401a, 457, 403b contributions: ~$40k
============================
Taxable Income: ~$40k
============================
(Refundable) Tax Refund: ~$8k
Effective tax rate: -10%.
Key ingredients: lots of kids, employer allows $36k in supplemental pre-tax contributions in addition to normal 401a, we’re frugal and can live on nothing. Of all the tax hacks your readers could do, readers with many kids should know the EITC like the back of their hand. Interestingly, neither Traditional IRAs or HSA contributions can be used to game the EITC. Only 401k, 401a, 457, 403b work to lower learned income.
Kids are great for taxes. I’m pretty sure Jr has been a source of profit for us.
Are you making HSA contributions via paycheck deductions? That eliminates FICA taxes on contributions, and I think would also reduce earned income for calculation of the EITC. Maybe.
Once again, you’re totally right. My employer doesn’t offer HSA so I have to purchase on the open market which is why it didn’t work for me. If they offered it in-house, I’m sure you’d be right.
But I do find it odd that EITC gaming can’t be achieved through t-IRA contributions. Oh well. All readers with lots of kids should be well informed on the kink-points of EITC. If you think there is enough interest, I’m happy to write a guest post for you. It’s one of the biggest avenues for tax hacking for parents of many children.
Send me over a proposal via email?
I sent you the proposal.
Cool, thanks. I’ll follow up later this week.
i thought you pay zero or close to that in taxes. what the heck happened?
We pay zero income tax. Last year we paid some self-employment taxes since the blog accidentally made some money.
I have some options to eliminate this, but 2016 was a busy travel year and I didn’t spend any time on it. I have some posts coming that will explain more.
Since you pay no income tax, I would have pegged the value of the business deduction of the service fees at 15.3% (combined employee/employer payroll tax). How did you arrive at 29% (56.10 – 39.75 = 16.35 / 56.10).
Our marginal rate is 15% and all tax is eliminated by credits (Foreign Tax Credit, Child Tax Credit, etc…) Any additional deductions increases the amount of $ we get back by an amount equal to the marginal rate (15%) plus the SE tax (15.3%) minus the deduction of 1/2 of the SE tax.
See our 2015 tax return for more.
This is definitely not a strategy I’ve thought of before! I’m hoping to start learning more about the tax strategies this year. It’s not something I’ve read a lot about yet. Thanks for the info!
My pleasure :)
Fun strategy Jeremy! You didn’t mention the Alaska Airlines annual card fee $75, and I’m wondering if that’s a factor in the cost here. Is it possible to book the trip and then cancel the card before the annual fee is due?
I couldn’t find anything in the terms and conditions that stipulated it wasn’t possible.
Is it a factor? You’ll have to decide. It does give you free checked bags.
The annual fee on the Alaska Card is charged right away. But you immediately get 30k miles and a companion fare that go into your account. You can cancel the card before the next fee is due the following year and still keep the miles and the companion fare.
Great strategy, Jeremy! I also use my credit card to pay my taxes to meet the minimum spend and get points to travel for free. It’s an awesome strategy to do for credit cards!
It definitely puts a silver lining on those tax payments.
Anything like this for Canadians?
I’m not certain, but if you have credit cards with signup bonuses and the Canadian tax authority will take credit card payments you are set.
If you end up owing considerable taxes, aren’t you assessed penalties for insufficient withholding (after the first year)? (p.75 of the 1040 instructions for 2016)
Yes, but not if you paid at least what you owed last year.
If anybody is uncomfortable with adjusting W4 and total withholding, you can just pay extra on a credit card to get the bonus and then get a bigger refund.
Yessir! Just did this yesterday for Q4 estimated taxes (all $600 of them). My state also has the same deal but charges $2 per $100. Still a great way to get that minimum spending requirement out of the way. We’re cranking away on $8,000 of Chase Sapphire Reserve min. spending and it’s a nice safety valve to know you can drop a thousand or two on taxes if you need to.
Since I get 2% cash back on my back up card, the 1.87% I pay to the feds is like making money if I use that card. I’m tempted to pay them several tens of thousands in January then claim a refund in February to get that 0.13% juice. It’s probably tax fraud for some strange reason but an interesting way to generate a tiny bit of “free” money. Could also be a good way to generate $10000-20000 of spending for some of those huge bonus offers on some cards (Amex Platinum??).
Just file an extension and make a payment of what you think you may owe at that time. I wouldn’t think there was a penalty for being bad at math ;)
At the rate you are going, you are going to get paid for going to Europe. Maybe if you rent your house out while you are gone…
I think we could pull off a “make money to spend the summer in Mexico” but not quite in Europe. :) Would be nice though!
If you guys are coming to Honolulu soon I would be very interested to attend a meet up if you are scheduling one. I live in Honolulu.
That would be great! Our beach time this winter will probably be in Thailand or Vietnam since they are just next door, but we would love to go back to Hawaii. I’ve spent a lot of time in Oahu too, great place.
I love this post. I owe taxes every year and this is a way to get some reward from those items.
Exactly! It’s a great way to get a little something out of the tax liability. Happy travels! :)
Looks like you are having too much fun! :) Well as long as you are pragmatic in your splurging! :) I am still in the contemplation stage … before plunging into retirement …. I have reached my numbers … but am remaining flexible … I was contemplating worst case market scenarios …. when I came on this article …. it recommends 10 years of bond and cash to ride out any mega storms … more conservative then a 100% stock position …. you may find it interesting …. God Bless, Canadian -China Comrade? :) … see link ….
http://www.caniretireyet.com/the-next-bear-market-how-bad-could-it-get/
Hi Michael
Darrow is a smart guy and that is a good article. It’s always fun for people to think about worst case situations and naturally conservative investors like to focus on them.
If you are following the 4% rule/25x spending rule, 10 years of bonds is really just another way of saying a 60/40 stock/bond portfolio. That is pretty standard advice for traditional retirement ages. For extremely early retirees, a combination of flexibility and more equities seems a more reliable way to go.
For retirement portfolio longevity, there are worse periods than the decade following 1972. 1965 was the worst, and I explored that in this post with various stock/bond allocations.
Cheers
Jeremy
Really interesting. I never thought about paying taxes with a credit card. I love reward points on credit cards and look to maximize them whenever possible. I paid for the materials for a new roof using credit card points, and just booked a trip to Kauai and Maui funded entirely by credit card points. Gotta love free money!
Thanks for sharing! I might have to check this out.
What about the annual fees on the credit cards. Usually they have first year free, and then an annual fee.
Do you typically cancel before 1 year is over? Is there an issue with cancelling those?
Sometimes we cancel, sometimes we keep the card. I just calculate the ROI on the annual fee to see if it is worth it. I just downgraded my Chase Sapphire Preferred card to a Freedom Unlimited to avoid the fee, while still keeping the credit line age and amount, so no change to credit score or any other issues. (Although credit score is more or less meaningless since we don’t intend to borrow money.)
You’re awesome, really. I had been looking around for some personal finance/early retirement blogs to read for the new year and I stumbled on your blog. In between my property tax and the income tax I will have to pay back this year, I have 8000 worth of tax payments in the coming weeks. I have the cash on hand but instead I applied for the Chase Sapphire Preferred and the Barclays Arrival card thanks to this post and I’m headed to Costa Rica for 3 nights for exactly $0. This Includes flight, hotel, breakfast, 3 dinners and yoga classes. I will have to pay the transaction fees which will come out to somewhere around $100 and also some miscellaneous travel costs but that’s nothing compared to what I’m getting.
Knowledge is power. Thanks for this post!
We’ve never been to Costa Rica, sadly. I’m a little jealous right now.
Have a great time! And thank you!
Another great post!
Paying taxes to hit the CC sign up bonus absolutely makes sense, but only if you don’t have other options that are cheaper. For example, my water utility doesn’t charge a fee to use a CC, and large prepayments are allowed. My gas/electric utility charges a flat $3.75 CC fee no matter how much is paid and large prepayments are allowed. So I could prepay ~$3,000 in utilities if I needed a little help earning a sign up bonus. Utilizing those options first before making a CC payment of taxes probably makes more sense, if those options are available. Of course, since you rent you probably don’t have those options.
Next year I might pay my taxes with the AMEX Business Platinum to get 100,000 points ($15,000 min spend), assuming nothing changes. We’ll see…
We’re also on our way to saving points for a 2018 Hawaii trip. Swimming with turtles is even better when the trip is done on the cheap!
Those are good options too, and probably worth doing just as normal best practices. For meeting minimum spend, I’d rather pay $5 but I’m ok with $50. I’m looking at the biz platinum card now as well.
This is great. I was wondering about this myself to use my new and first travel-hacking card. What’s the rule on paying fees to use card for points? (is this manufactured spending?). I am guessing since you get at least a point per dollar and a point is valued at about 1.5 cents then the rule of thumb would be to pay at most 1.5% in fees. And this only works if you are getting a bonus, not for regular points… correct?
If you are paying 1.5 cents to get 1.5 cents in points, it is a wash. I wouldn’t do that unless it is for the purpose of getting the signup bonus. There are many different ways to meet minimum spend requirements, this is just one of them.
We have been paying estimated taxes for a few years to get us the Southwest Companion pass via Chase. The service fee is tough to swallow at first but getting a years worth of free air travel exceeds the cost of the 1.87% many times over. It is funny when people tell me I am crazy to pay taxes on credit cards because of the fees, but they have no idea it is about a 500% return on investment!
You are definitely crazy. Crazy smart!
I was just considering that this year. I owe approx 500k in taxes on April 15. Any other creative ideas to maximize this?
Hire a team of accountants and lawyers?
I of course already have this team in place – was talking about frequent flyer awards – I def am going to get the Southwest Companion pass.
You need to look at any travel or reward card that you use and determine if the vig of 1.87% is worth the benefit you will get from paying with it. At that dollar value I assume you have a black card or something and should call the concierge to see what they can do to help.
Hi Guys,
You still at my favorite place in America?
If so, check out Ono’s on Kapahulu for the best laulau and ahi poke
Also check out the Kahala Resort and the free dolphin show and feeding. The beach is really quite and secluded too.
S
Thanks boss! Stuff for next time.
Oh yeah, and do the Makapu’u Lighthouse Trail and Koko Head Botanical garden hikes. AWESOME and easy for the family!
I never looked at taking the hit on the processing fee as an extremely discounted rate for lodging and or travel – but that really is what it becomes and then it makes it a no brainer – most folks bundle their property tax with their mortgage payment, simply get that removed and pay separately, depending where you live, have four opportunities to take advantage of reward card offers, all for a nominal fee — simply brilliant, thank you for the share.
I thought that paying property taxes, student fees (items that don’t allow payment by credit card) via one of the services that does it would be a good idea. When I inquired with my credit card company (RBC Avion) I was told that these types of payments are viewed as cash advances, i.e. no points. Is this just a Canadian thing?
I’m not familiar with Canadian stuff, sorry. The examples in this post are definitely not cash advances.
I was holding out for both of us to be able to get the CSR in October 2017 (when we’re back under 5/24)… but now I think we’re going to a few thousand in taxes (whoops), so I’ll have to rethink my plan to wait. Curse missing the 100k sign-up bonus!
I believe you can still get the 100k sign-up bonus if you apply in a Chase branch. Not sure if there are Chase branches in AK, but might even be worth flying to WA or CA for an extra 100k points.
It’s available if you’re pre-approved for it. So no guarantees you can just walk in and get it if you’re over 5/24. You have to have an account with them I believe (can be an existing card) and then you have to be on the pre-approved list.
Can you buy a plane ticket using (partially) Chase ultimate reward points, and partially using another credit card (e.g Capital one venture card for travel credits) ?
I may not have full Chase points, so want to use some of that and some of another card. Does chase allow that, assuming booking via their portal (where you get 1.25 times points)
You can use a UR points / Chase card combo. I’m uncertain about the option of using a. On-Chase card.
Good read. One of my goals for 2017 is to up my “travel hacking” game. Your site is pretty helpful with that.
So, my wife asked….what do you do with the card when you have reaped the sign up bonus? We already have about 4 cards… I think you said that you don’t cancel… Throw them to the side? And what about those with annual fees? Thanks
It depends on the ROI. Some we keep, some we cancel / downgrade. See here.
I did not know I could pay my taxes with a cc and I love the idea, especially if I can claim the fee as a business expense! I have not applied for a new cc since I retired 6 years ago…I still make a little side income with consulting but I guess I thought that I would not be able to show proof of enough income to qualify for another card. What do I need to include in my income on the application since my family is currently living off my consulting income, cash savings, and a few dividends ? (I am 57 so not drawing from any retirement accounts or my pension yet). Thanks!!
Dividends and consulting income are income, just put that. Lower incomes just mean lower credit amounts. You can even apply for business cards, which have some of the best signup offers available.
Thanks for the great information. I may be missed somthing. The bonus points of these travel cards are only available for the first year. Does it mean that I need to apply new cards every year and cancel them next year so I don’t need to pay too much annual fee?
Thanks!!
It depends.
Aren’t you negatively impacting your credit score and rating by opening and closing cards all the time?
The opposite, actually.
Do you have any tips on adjusting withholding with the recent changes to the W4 form? I had been following this strategy for the past few years, but it appears the IRS has made it more difficult to adjust withholding downward with changes made in 2020.
Add deductions to offset however much you plan to make in estimated tax payments