Large tax bill. How should I pay it?

January 12, 2022 8:55 AM

I am going to owe 5 figures in U.S. income taxes this year. Can I make this work for me?

Because I am a freelancer who really isn't especially business-minded (see any number of previous questions), I find myself with the prospect of a large tax bill this year (say, $30k). I can pay it, and normally I'd just write a check and be done with it. But the amount got me thinking: am I leaving money on the table? There's no way to, like, put it on a credit card and get massive amounts of air miles or anything, is there? Cash back? What clever options have I not considered?

(Assume I don't need advice about tax strategy - this is the bill, and I have to pay it. Just wondering whether I can turn into a tropical vacation or whatever to take the sting out.)

posted by catesbie to Work & Money (15 answers total)

You'll get hit with about a 2% processing fee to pay with a credit card so you'd need a card that paid you back >2% to make this work for you.
posted by jabes at 8:59 AM on January 12, 2022 [4 favorites]

But the amount got me thinking: am I leaving money on the table?

Do you already have to pay your income tax quarterly? You already are basically taking all the money off the table by not paying it regularly throughout the year like most people do.
posted by The_Vegetables at 9:07 AM on January 12, 2022 [5 favorites]

If you take the view that inflation will be elevated in 2022, and can put the money to good use for a few months, it's worth setting up a payment plan. You can do a 180 day plan for free or a longer installment plan for a fee. If your balance is under $50k you can set it up online.
posted by michaelh at 9:08 AM on January 12, 2022 [3 favorites]

If you're willing to go through the hassle of a new card/cards, you could rake in some sign-up bonuses - a $5k spend is standard for a bonus, so you could potentially get more than one. I did this before for a one-time unexpected tax bill (was admittedly much smaller) to get some bonus airline miles out of it. Of course you'd have to be willing to pay the processing fee, so it's not exactly free but can still be a very good deal.

/r/churning is probably your best bet for specific card recommendations.
posted by photo guy at 9:10 AM on January 12, 2022 [9 favorites]

You can pay your taxes with a 1.96% fee through payUSAtax and get 2.5% rewards through Alliant Cashback Visa for a 0.56% arbitrage opportunity - making you $168. You'll have to pay the tax over multiple months; Alliant only offers 2.5% up to $10K/month. You may also prefer other rewards - for instance, I collect Amtrak point that are worth roughly $0.028/point.

As photo guy mentioned before I got here, taxes offer an easy way to meet the minimum spend requirement of credit card bonuses.
posted by saeculorum at 9:28 AM on January 12, 2022 [2 favorites]

Yes, if you're going to do this (and, I mean, I would) check with r/churning and r/creditcards for specific recommendations on which cards and what order to apply for them in. Then do your own research to make sure the advice makes sense for you specifically. They'll need to know your credit score from at least one agency, which a lot of banks and credit card issuers give you free access to these days, as well as a list of which cards you currently have and their limits. There are definitely some nice public (no invitation needed) sign-up bonus offers around right now. If you qualify for one of the Chase Sapphires for example (you'd need to do the math on whether the Reserve is worth it, but it certainly might be), they have a transfer partnership with Hyatt that offers very favorable points rates on very nice properties. Cashing the bonus points out isn't a bad move either, if you'd rather have the money, but you can generally get more "value" out of airfare and/or hotels.
posted by teremala at 9:51 AM on January 12, 2022 [1 favorite]

If you qualify and it makes sense for you, the new Capital One X has a signup bonus that requires $10k spend over six months.
posted by mosst at 10:03 AM on January 12, 2022 [4 favorites]

There's a pretty good chance you'll be hit with extra fees for not paying this quarterly, especially with a bill that large. You actually have a few days left before the 4th quarter pay deadline so can probably save money by paying some of it right now as opposed to in April.

If you're sure you don't need to pay estimated taxes, I'm curious how you're getting around that. But you probably do and are just paying the penalties by waiting to pay a lump sum. If you're already paying quarterly estimated taxes than you can ignore this
posted by JZig at 11:10 AM on January 12, 2022 [2 favorites]

Response by poster: (I do pay quarterly. It's a pass-through LLC - I pay personal income taxes when I get my paycheck, and now I owe on the remaining profit in the business account.)
posted by catesbie at 11:27 AM on January 12, 2022

Depending on your comfort with cryptocurrency and staking a chunk of money into it for 6 months, Crypto.com offers some cards that might interest you. The highest tier offers 8% "cash back" in the form of CRO tokens.
posted by mezzanayne at 11:41 AM on January 12, 2022

American Airlines has switched to "loyalty points" as a metric for flight status as of 2022. That means that unlike previously (and unlike most airlines), credit card spend counts for airline status as long as you use an American Airlines branded credit card. I think if you chose to get a Citi Platinum AA Card you would earn 50,000 miles as a bonus for opening the account, 30,000 miles for spending on the card (80,000 miles total).

The 30,000 miles you'd get from actually paying taxes on the card the card are worth roughly $360, plus automatic Gold status (conveniently, the threshold is 30,000 loyalty points). That's the only way I can think of to get airline status in addition to miles, which would get you priority boarding and a free checked bag for a year among other small things, so if that's worth $240 to you maybe paying the 2% fee is worth it.

If you don't care about airline status or American airlines isn't convenient you can also check here, which conveniently includes a paragraph starting with "For example, say that you have a $30,000 tax payment due...." and focuses on how to maximize your monetary reward even if it means splitting across cards.
posted by true at 12:00 PM on January 12, 2022 [3 favorites]

Just a quick comment: while TPG offers very clear and helpful high-level introductions to this game, do keep in mind that part of their business model is getting you to sign up for certain cards through their referral links. Always read the exact terms of what you're applying for and make sure it's right for you both for this purpose and as a longer-term arrangement. There's no major "gotcha" I'm trying to warn you off of, except that the more you read that site (and, to be fair, many others in the same niche), the more you realize that many of their contributors seem to be spending an incredible amount of actual money annually, especially on travel and entertainment, and if that isn't your lifestyle their recommendations might not mesh quite as well as the confident, exciting articles make it seem.
posted by teremala at 2:53 PM on January 12, 2022

Response by poster: Thank you all! This is super helpful. I think crypto is a step too far for me, but I am willing to wade into the mileage-nerd forums!
posted by catesbie at 7:12 PM on January 12, 2022

Have you already contributed to a SEP-IRA? And a traditional IRA?
posted by small_ruminant at 8:39 PM on January 12, 2022

Bank of America has a 1.5% cash back card no annual fee card that boosts to 2.62% if you meet their Premium rewards criteria (100k with merril edge counts). BofA of course is a devil, so YMMV on whether its worth the hassle.
posted by pwnguin at 12:11 AM on January 13, 2022