Lazy Man and Money

Travel for Free by Hacking Your Taxes?

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Many personal finance bloggers love to write about travel hacking with credit cards. As you can tell by that link, I’m one of those bloggers who have written about it in the past.

Hack Travel Taxes

Last year, we had a lot of expenses in renovating some investment condos. It required us to put up a significant amount of money into the projects. It’s money we had in our various emergency funds. My wife and I applied for quite a few credit cards that had bonuses for spending a minimum amount. Most of them earned us the equivalent of $500 in travel if we spent $3000. That’s the equivalent of getting more than 16% back as long as you use the points.

Back then, I would keep track of what all our points/miles and worth. It was around $6,000 which is pretty exciting! It wasn’t all from the credit cards. Some of it was from saving up Marriott points for years at our timeshare. Some of it was from my wife’s work travel.

We used some of them late last year and will use some more this year. We’re saving up a large portion for a potential return to Australia. Hopefully our trip won’t collapse the United States’ Financial system like it did 10 years ago.

You’ll notice that this article has been about my travel hacking last year. Why? We haven’t been able to do it much this year. Many of our expenses aren’t ones that we can pay with a credit card. Our mortgage can’t be paid with one. The kids’ school can’t be paid with one. We don’t pay for electricity due to our solar panels. I like to reduce our expenses on all the other stuff, so there’s often no guarantee that we’ll get to the minimum spending necessary to earn the rewards.

Then I read an article from Joe of Retire by 40. He’s hustling for free travel using credit cards. I’ve been following Joe’s blog for a long time and we have a lot of financial similarities. One of the differences is that he’s paying estimated taxes on his blog earnings. We don’t pay estimated taxes. I’m an employee of my blogs S-Corp (and have taxes taken out as part of payroll). My wife also chooses to withhold a little more money on her day job.

It turns out that you can pay taxes with a credit card. The processing fees vary, but it looks like it can be as low as 1.87%. (Why would anyone choose the other options to pay more?) If you had to pay $10,000 in taxes that’s $187 in fees. At first it sounds like a raw deal.

However, if you are putting it on three credit cards that have $3000 minimum spending, it could earn $1500 back in travel points depending on the credit cards. Would you pay $187 for $1500 in travel rewards? Of course, right? If you are going to travel anyway, that’s $1300 in free money.

I have to admit that I really haven’t looked at changing our withholdings. It’s been nearly a couple of decades since I even thought about how it works. I usually like, “Set it and forget it.” It fits with my whole Lazy Man brand. However, I’m willing to change my ways if it means an extra thousand or two a year in free travel.

I have to admit that I’ve never heard of anyone doing this. (That doesn’t mean it hasn’t been written about before as it is pretty close to Retire By 40’s plan.) Maybe there’s a gotcha that I’m not seeing?

So to recap, here’s the plan to hack free travel with credit cards and taxes:

  1. Increase withholding allowances so less tax is taken out of your paycheck. (Needed a correction there.)
  2. Get a credit card that offers a $500 reward for spending $3000 in the first 3 months. (That’s an example. I’ve seen a lot of these around.)
  3. Use the credit card to send a tax payment to reach the minimum.
  4. Pay off your credit card from the money that wasn’t taken out of your paycheck in step 1.
  5. Repeat steps 1-4 quarterly or as often as you can depending on how much tax you need to pay.
  6. Enjoy your reward bonuses (minus a little in fees for using a credit card) of travel.

What do you think? Does it work?

Why Nearly Everyone is Getting Scammed by Taxes (Not the Way You Think)

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Happy Tax Day… said no one ever.

In fact, taxes are so bad that people forgo billions of dollars collectively to just get it over with.

I just got an email my tax preparer that our extension is safely filed. Phew! Wait, what! Extension?!?!

It’s true. For around the 10th year in a row, we are filing an extension. Actually, “we” is wrong. My wife did ALL of the difficult personal tax stuff. I’ve been slow to put together the paperwork for the S-Corp. Unfortunately, the personal tax filing requires the S-Corp to be filed first as those numbers will feed into the personal filing.

This means that I’m writing this article about filing taxes (we’ll get to that in a minute) instead of filing taxes. That’s exactly how much I dislike filing taxes. And remember, I have a tax preparer.

I have written about some of the tax scams out there. Most of these are run by individuals trying to steal your tax refund.

The scam today that I want to talk about it that most of us shouldn’t be filing taxes at all. By the way, since many lawyers seem to sue me for using the word scam, please see the disclaimer below indicated by the “*”.

While that’s my opinion, it’s based on my understand of reading ProPublica’s Filing Taxes Could Be Free and Simple. But H&R Block and Intuit Are Still Lobbying Against It.

I’ll let ProPublica explain:

“Here’s how preparing your taxes could work: You sit down, review a prefilled filing from the government. If it’s accurate, you sign it. If it’s not, you fix it or ignore it altogether and prepare your return yourself. It’s your choice. You might not have to pay for an accountant, or fiddle for hours with complex software. It could all be over in minutes.

It’s already like that in parts of Europe. And it would not be particularly difficult to give U.S. taxpayers the same option. After all, the government already gets earnings information from employers.”

One of my favorite shows, Adam Ruins Everything, has an extremely funny 3-minute video that expands upon it in more detail:



You should really watch the video if it is at all possible.

The ProPublica idea of how taxes could work makes a lot of sense, doesn’t it? For me personally, there would likely be a lot of corrections to make. Or I might have to prepare my taxes myself. That’s on me for having an S-Corp, rental properties, and some other stuff that is less than standard.

The promise with the latest tax reform was that Americans could do their taxes on a postcard. So it stands to reason that a fast majority of Americans could instead review the postcard that the government sends them, signs off on it, and drops it off in the mail. It could take a majority of Americans 30 seconds assuming that they have to go to the post office anyway.

We could even get really crazy and make it possible to confirm and fix online. I understand there some security concerns with that, but the Social Security Administration already has a ton of financial available online.

It seems that the major problem for reaching this tax utopia is that the tax preparation companies themselves seem to lobby congress to shoot down bills that would allow it. It doesn’t sound logistically complicated and other countries are doing it successfully.

We could probably save a billion hours of productivity and billions of dollars of consumer dollars if we just did the sane, bipartisan process that we use for just about every other billing procedure (as explained with the pizza delivery example in the video above).

The other day my wife was reading something that involved the term “racketeering.” I started to explain it the best I could, but then I realized I should rely on a more formal definition. Investopedia defines racketeering as:

“Racketeering, often associated with organized crime, is the act of offering of a dishonest service (a “racket”) to solve a problem that wouldn’t otherwise exist without the enterprise offering the service.”

A lot of that definition stuck in my head when thinking about the situation about tax preparation. I want to be very clear that tax preparation is NOT a dishonest service or alleging they are racketeering. In fact, the more I read the definition the less it seems to fit. Originally, I thought, “Hmmm, in the context of the ProPublica article, for many people tax preparation seems to be aimed at solving a problem that might not exist if not for the tax preparers’ lobbying to keep the problem in existence.” Parts of that opinion still feels right to me.

I’m not saying that this new system designed by ProPublica would be easy and perfect. However, can anyone argue against this as a great way to help tax payers save billions of hours and dollars?

How do you feel after reading all this? Let me know in the comments.

Update April, 2019: Now it looks like Congress is trying to ban the government from making free tax filing due to lobbying by the tax prep industry.

* I use “scam” as my opinion for anything that just doesn’t feel “right.” I wrote a little more about it here. It doesn’t mean that anything illegal is being done here. In fact, I often use it as in this exchange one of my favorite movies, Say Anything. It feels weird to add this paragraph on at the end of my articles to make it clear for lawyers, but that’s the world we live in. It should also be noted that I draft and publish my articles very quickly, as intended by the blogging platform, and thus this is most informal of writing styles with zero proofreading.

Looking Ahead to 2018 Taxes

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I was originally going to use “Forward” instead “Ahead” in the title, but I couldn’t get myself to put “looking forward to taxes” in any form. In fact, a reasonable argument could be made that I’m procrastinating doing my 2017 taxes right now.*

When the Tax Cuts and Jobs Act was passed last year, I planned to write an article about what it meant for our family. I’d love to be able to tell you what it means for yours, but it is very complex and it touches so many areas of everyone’s financial life. Truth be told, I need to see my own tax advisor to get a better idea of what it means for us. (That’s perhaps just the motivation I need to get 2017’s taxes done.)

Tax Time

Fortunately, March’s issue of Money Magazine does a decent job of breaking down some of the big areas of the change with an article called “What the Tax Law Means for You.” I was hoping to find the article online, but I could. When I was reading it, I have to admit that I got a little excited. I don’t believe that the new tax law is a positive for America on the whole, but at least it looks like we’ll do well.

The article lays out a number of scenarios that I’ll cover in order:

“You Have a Middle Class Job”

This section indicates that those who are earning $49,000 to $86,000 will save on average, $930. Those from $86,000 to $149,000 will save more… $1,810. My dog sitting and blogging income isn’t that great (I’m focused on other things), but my wife does well as an active duty pharmacist. We usually are in that second bucket of taxable income.

Money magazine provides a chart of several profiles and what their taxes might be. Unfortunately the married with two kids (us!) profiles are for incomes of $30,000 – $75,000. The married with no kids (not us!) profiles are $135,000 income (us!) in high-tax (us!) and low-tax states. Finally, there’s a wealthy ($250,000) single business owner with no kids. While my blog puts me as a business owner, I’m certainly not wealthy, single, with no kids.

This should save us some money because the double standard deduction and double child credit are probably better than what we’ll have in 2017. This means that we might not have to itemize.

“You’re a Working Freelancer”

People working for themselves will be able to take a 20% deduction on their income. Like everything with tax law, it isn’t as simple as that, but that’s the gist. It seems that my blogging and dog sitting income fit firmly in this area. This is one of the areas that won’t impact a large percentage of people, but I happen to be lucky enough to fall into this bucket.

“You’re Buying or Selling a House”

We have no plans to buy or sell houses any time soon. The big tax change here added caps for deducting mortgage interest and property taxes. I think we’re going to be lucky here too. We bought our home in 2011 and refinanced to a 15-year mortgage in 2013. Mortgages are structured so that the mortgage interest is the most in the first few years and it gradually reduces until the end when you are mostly paying principle. So we have had a few years of deducting the high mortgage interest and are moving into the lower mortgage interest territory.

That refinance to a 15-year mortgage is looking better. As my father used to say, “Sometimes it’s better to be lucky than good.”

Our property taxes (and other associated taxes should fit well under the $10,000 cap. My friends in California, New York, and Massachusetts are probably not as lucky.

I suspect the double standard deduction will be better for us.

There’s a prediction that our home won’t appreciate as much due to the changes. However, as we don’t intend to sell any time soon, there’s no real immediate impact to us.

“You’re Paying for School”

This is a change where 529 plans can be used to pay for private schools, age K-12. This is us… we pay for private school. We plan to pay for the current school until 8th grade… and after that we’ll re-evaluate.

In fact, we’ve been saving money in a Coverdell, precisely because they can be used for private schools. Unfortunately, Coverdell contributions are limited to $2000 a year, per child. So if we save $2000 each year for the kids through the first 6 grades, we’ll probably be able to use the Coverdell for the 7th and 8th grades.

The new law allows for 529s to be used, which aren’t limited like Coverdells. This could be good news for some extremely wealthy people. For us, the current cost of private school, saving for retirement, 15-year mortgages, etc. means that we don’t have a ton of money left over to put into a 529 plan.

The other flaw with this is that the money that is going to be used for K-12 schooling doesn’t have a lot of time to compound. Maybe if you put a lot of money in at birth of a child you can get 15 years of compound interest for the last couple of years of private high school. However, at that point, most people would probably be thinking, “This money is best left to compound another year or two for college.”

This feels like something that politicians stuffed in because it helped them or other extremely high-income people.

“You’re Saving For Retirement”

The point that Money Magazine makes here is that the reduced corporate taxes will translate well to companies’ bottom lines. That’s good for stock prices. So if you are investing in equities for retirement, you might see those accounts go up in value.

We’re a little less than 20 years from being able to access most of our retirement accounts, but the plan is to not touch them for longer than that. I’m not convinced this tax rate will still be helpful 20-30 years in the future. Maybe it will, but I’m not counting on it. Let’s check back then and we’ll see.

Conclusion

In almost every case, we stand to do better with the new tax law. In some cases, like the buying and selling of houses, there may not be any real change for us. In most of the other areas though, we either stand to do better or, get more options (like with the change in 529 plans).

I don’t know how we managed to be so lucky to catch all these potential tax breaks. I’ll check back in when I get more information from my tax professional.

* A better argument could be that my preschoolers are on their two week spring break. We spent a few days at the University of Florida so my wife could complete some graduate work. That was one of the reasons why we hacked Disney World for 5 days… we already had to fly close to there anyway. That was followed up by my wife going to her annual pharmacist convention while I returned back with the kids. Long story short, there hasn’t been a lot of working time for me, anyway, much less time to do taxes.

Tools to Limit Your Tax Liability

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This is a sponsored post written by me on behalf of E*TRADE. All opinions are 100% mine.

One week from today is tax day. For some that day is more frightening than all the witches and ghosts on Halloween. Unlike most people, I don’t mind paying taxes. It typically means that I made a good amount of money.

I do mind tediously putting all the numbers together. I’d rather face a vampire. I’ve watched enough Buffy the Vampire Slayer to feel like I know how deal with them (Roundhouse kicks always work).

Whichever way you feel about tax day, the E*TRADE Education Center is here to help. It’s completely free and you don’t even have to be an E*TRADE customer to use it. There’s no sign-up or log-in.

I focused immediately on the Small Business Taxes section. That’s the hairiest part of my taxes. However, you might be more interested in in this tax planning section:

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If you happen to be an E*TRADE customer, you have access to the E*TRADE Tax Center. That center provides an array of tools and resources for customers, such as important information on everything from cost basis reporting and tips on managing capital gains and losses, to frequently asked tax questions.

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Why is the Education Tax Center important?

E*TRADE conducted a recent StreetWise survey to find out what investors believed when it comes to taxes. It turns out that many investors heavily consider taxes, which I found relieving. Unfortunately the same survey found that most people don’t use the tax tools available to them. That’s something that E*Trade is looking to change.

What else was interesting? Some 45% most investors believed in putting money in tax-advantaged accounts such as IRAs, 401Ks, and Health Savings Accounts. I had expected more, but I generally over-estimate people’s investment knowledge.

I found it surprising that 18% believed in selling positions that lost value to offset the capital gains, but only 17% believed in holding investments for a year to ensure lower taxes on gains. I would have thought the latter would be more well-known. Perhaps people weren’t focused on the taxes on the gains because they are investing in tax-advantaged accounts.

One number that stood out to me that is that only 4% look to invest in funds with low turnover. At first glance that seems low to me. However, I usually look at the expense ratio in an ETF and use that as my proxy for all this information. Most of the high turnover is in managed funds, which I typically don’t get involved with anyway.

The moral of the story, you don’t have to like paying taxes, but you can make moves to lessen the bite of paying them. If someone is going to give you the tools for free, you might as well use them.

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What I Learned by Doing My Own Taxes

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This post is part of the TaxACT #DIYtaxes blog tour which shares stories and tips about doing your own taxes and how it makes you smarter about the overall health of your finances. Do your own taxes today at TaxACT. You got this.

My taxes weren’t always this complicated. It used to be a pretty W-2. The most complicated parts were the few write-offs like the excise tax in MA. Over the years, I’ve added a wife and the requisite 2.5 children (a dog counts as half, right?)

The wife is in the military, which lead to us moving away and turning each of our existing condos we owned into income properties (they were too far underwater to sell). And this blogging “thing” took off to being its own full-time business. Suddenly we’ve got military exceptions, rental property, business and child care write-offs.

As complicated as it is, it could be a lot worse.

Back in the dot-com boom, I used to actively trade internet stocks. Sounds glorious, doesn’t it? Well my account had about $8000 in it, which means if I worked out a 1% gain on the day (which is huge on an annual basis), I would make a grand total of $80. I’d pay a good part of that gain in commissions to Datek who had my brokerage account. It wasn’t a super-smart plan and I did it mostly for fun. I wasn’t expecting to get rich.

Then tax-time came around. That’s when the tax software I used told me about the “wash rule.” Essentially, when you are buying and selling the same stock, you can’t claim a loss unless 30 days go by. (This is a purposeful gross simplification. There are many great resources that are far better suited at explaining it than I am.) Fortunately, tax time rolled around before I had done too much trading that would have been effected by the rule.

There’s something powerful in getting down and dirty with your taxes. It forces you understand the reality of how you did financially the previous year. Here’s just one example. I often keep a running tab of how much money I make on my internet businesses each month. It isn’t until tax time that I dig into the expenses. I find domain names that I never used. They seemed like a great idea at the time. I also found a hosting service that I no longer use. Why am I paying a monthly fee for it? (Note: As I’m writing that sentence, I’m canceling the service.)

I suppose I could hand a bunch of paperwork and statements to someone else and have it done for me. If I did, I would avoid looking at these expenses for years.

Friends and family sometimes consider me the “money expert.” With that, comes questions like, “Do you do your own taxes?” I think what they mean to ask is, “Should I do my own taxes?” Most people don’t have rental properties and small businesses with military exceptions. I probably fall in the 3-5% range of people who have “weird taxes.” I always recommend my friends and family do their own taxes.

The last few years, I have had a tax advisor. She’s a friend of the family and very good at what she does. I also get a good price (not sure if I get a family discount or not). Combine that with my tax situation and there are enough factors to push me to use her services. Before she even looks at a single piece of paper, I’ve done hours of work analyzing expenses, pouring over receipts, and getting dirty with the numbers.

Beating the tax deadline doesn’t have to be stressful. With TaxACT, everything you need to confidently prepare and e-file your taxes is right at your fingertips. You got this. File your simple or complex federal return FREE today with TaxACT Free Edition.