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.
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:
withholdingallowances so less tax is taken out of your paycheck. (Needed a correction there.)
- 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.)
- Use the credit card to send a tax payment to reach the minimum.
- Pay off your credit card from the money that wasn’t taken out of your paycheck in step 1.
- Repeat steps 1-4 quarterly or as often as you can depending on how much tax you need to pay.
- Enjoy your reward bonuses (minus a little in fees for using a credit card) of travel.
What do you think? Does it work?
That’s pretty good. I think it’ll work. Can you wife change the withholding that much?
I’ll need to ping you about S corps. I talked to a tax guy yesterday and he told me it’s not really worth it until the company makes about $80,000. Do you use an account to do all the S corps paperwork? I’ll email you later.
Thanks for the mention!!
Lazy Man says
I’m not sure. It’s been a long time since I looked at withholding.
Technically you can’t enter a number of allowances that is unsupported. That said, I am not sure how quarterly payments come into play, since I’ve never done that.
Even just a 2% fee is a drag, costing (e.g.) $60 of your profits. So in my eye it’s a last-ditch tool, best avoided (but hey, it’s better than buying things you don’t need!)
Personally, this strategy wouldn’t help me much, but I am not a signup bonus churner. When I do need a min spend, I just use that card as my regular card for a couple months, like they originally intended. We pay for our day card with a credit card, and that’s a bigger annual bill than our taxes!