In his blog he talks about how even W-2 wage earners can enter an ‘Exempt’ status on their W-4 and make estimated tax payments if you plan to have no tax liability. You can meet this qualification when you make your estimated payments on time (to avoid the penalty) and you plan to have no taxes due by Jan 15th of the following year, meaning you pay your estimated taxes to meet your full tax liability. The ‘profit’ part comes in when you use a credit card to make your estimated tax payments to earn CB on your Citi Double Cash or other rewards credit card and earn a small profit after the processor fees. Even better, if you itemize you can receive a deduction for your processor fees for filing taxes.
The ‘fun’ part with the real benefit is the ability to file an extension (make sure you meet your tax liability by Jan 15 for your last quarter or you will get a penalty). You can time a large overpayment during the following year before the Oct 15th extension deadline to coincide with meeting minimum spend on a credit card signup bonus or two. At that time, you file your extended return and within two weeks should receive your overpayment from the IRS in plenty of time to pay your credit card. I would warn not to go too crazy with your overpayment at the risk of the IRS’ wrath (nobody wants that), but there is no penalty or set maximum to the overpayment you can make. A couple thousand overpayment shouldn’t be a big deal. Meet your credit card minimum spend for your signup bonus for fun and profit.
Filing An Extension for Backdoor Roth IRA Horse Race (NO LONGER VALID WITH 2019 TAX CHANGES)
With credit to therivler1 in his thread Roth IRA Horse Race, you can convert from a Traditional IRA to a Roth IRA with the option of undoing the conversion before you file your tax return. This strategy is best used when you start your conversion from your IRA to multiple empty Roth IRA accounts in January of year 1. You then recharacterize the ‘losers’ of your Roth accounts back to your Traditional IRA before October 15th of year 2 when you file your extended return. You keep your best conversion ‘horse’ in your Roth and pay no taxes on your gains. Any losses you recharacterize back to your Traditional IRA are shared with Uncle Sam when you go to withdraw after retirement.
Entering an exempt status on the W-4 means you’ll have to pay all of your federal income taxes yourself. If you can’t or don’t want to charge that much, you could instead write in a a higher number of allowances. One allowance reduces your taxable income in the amount of one personal exemption (currently $4050), so if you’re well into the 25% bracket you’ll owe an extra $1012.50 (approximately) for each allowance.
I file my tax extension for fun and profit every year because I absolutely hate doing my taxes. I do fancy stuff and it takes me a whole day or two to fill out the forms.
Eventually, I will die. If, for the rest of my life, I file an extension and wait until Oct 15th to file, then if I wind up dying between Apr 15 and Oct 15th, I will have gained 2 days of my life.
Given that this is a 6 month window of time, all else equal, there’s a 50% chance I die during this window of time, and statistically speaking, I’ve saved 1 day of my life already (50% likelihood * 2 days life savings)
This is a bold statement, and I didn’t read the article, but unless this guy is significantly caveating this claim, I’d take it with a barrel of salt. There are only very specific situations in which you can claim exemption from withholding on the W-4. Making estimated payments to meet your total tax amount is not one of those situations.
The statement I quoted may technically be correct, but “no tax liability” is not the same as “no tax due” with the return. It seems like he’s advocating the use of estimated payments to result in “no tax liability” - that would actually be “no tax due” but there is still a tax liability.
I too would be wary of claiming an exemption from W-4 withholding. In fact, I would recommend against it.
I’ve heard of some people who are W-2 employees, shift their taxes to the end of the calendar year. They would claim a high number of exemptions in the first 2-3 quarters to minimize the tax withholding. Then in the latter part of the year, change their W-4 withholding to catch up.
In essence, they still have the correct amount withheld in total for the year, just in unequal installments.
According to the Wealthy Accountant’s comment section, withholdings would only ever become a problem if you end up in arrears in taxes or manipulate them to delay paying taxes when they should be due. As long as you make estimated payments to never have more than $1,000 of tax liability, the IRS should have no reason to have issues with your withholdings. It’s if you ever have more than $1,000 in tax liability (amount owed) that it could become a problem.
I don’t know where the commenter is getting that information. It may be a safe harbor I am unaware of, but unless I’m missing something, claiming exemption without meeting the requirements to claim exemption could be a crime. If you want to risk that for the maybe 2-3% net credit card rewards, so be it, but to advocate for it is entirely different. Nothing against you Corndogg, I’m referring to this “Wealthy Accountant” guy.
I have no idea whether the IRS takes this seriously or whether they would actually charge you with a crime for doing something like this. I’d imagine it comes up more in the form of an affirmative act in certain types of felony cases, but I don’t really know. All I know is that I would never recommend this to someone.
The commenters in his blog were asking the same questions you are, and had the same concerns. The Wealthy Accountant is providing the details of safe harbor requirements and how not having any tax liability means not having any tax owed, and staying within those boundaries should prevent the IRS from having any issues.
I certainly do not want to recommend or promote any strategies that might be illegal or suggest anyone do something against the rules. I appreciate your suggestions on being wary of exemption rules. I came across this strategy and thought where better to share it than FD. At the least, it sparks good conversation and warnings such as yours. Again, Appreciated.
However if you enter “taxes withheld” higher than total taxes, it will recommend a very high number of allowances, resulting in 0 additional taxes withheld.
Is interesting that it doesn’t have a field for estimated payments. Seems like it’s either forcing an overpayment if you had high earnings (with estimated) early in the year and then a drop off of income later OR is allowing you to enter estimated taxes in “taxes withheld”.
Thanks Bend3r, this is an interesting exercise. If you were to entertain this strategy, perhaps it is better for a W-2 employee to enter something like 12 allowances on their W-4, resulting in 0 or very little withheld instead of entering ‘Exempt’ while making estimated payments. In practice, the IRS shouldn’t have a problem with your withholding as long as you pay all your tax liability that is due via estimated payments according to safe harbor. They would of course be more apt to take notice if you under-withheld and didn’t pay your liability (resulting in a fine).
I mark down 9 on my W-4 for exemptions and pay the rest with VGC at the debit card rate to avoid the post office mess. Never had an issue. In the past employers would send W-4s over nine to the IRS for verification, but I don’t believe that is done routinely anymore.
If you just make a Q4 (or Q3) estimated payment and not equal payments each quarter BUT you also reach the safe harbor (solely through payroll deductions) — Do you then have to go through the form for unequal income to avoid a penalty on the estimated payment(s)? Or, will the safe harbor still apply and no additional work necessary??
I need to fulfill Amex spend in the next 2 months. I don’t think the payment processors will accept 2017 1040 payments until mid January. Have not called and asked yet, though, and don’t see a date listed on their websites.
If you reach the safe harbor through payroll deductions, there’s no under-withholding penalty. You can also pay however much extra you want (although don’t go too crazy - there could potentially be consequences if you’re doing something like paying $1M on a $5,000 tax liability). Do payment processors take Amex? Or are you planning to use GCs?
They all take Amex. ~$60 in fees for $3000. Gift cards are supposed to be “dangerous” for Amex bonuses, at least from minimal research. My plan is just a single lump sum payment (maybe $1000~$2000 of the required limit?) as an estimated tax payment, no gift cards involved.
Yeah, I knew there should be no penalty but didn’t know if I’d have to fill out the monthly estimates on the form to explain uneven estimated payments (just in Q3 or Q4)
The IRS may lose your payment, or rather not associate it with your return. If you’re paying more than once, make each price unique and keep your tracking numbers in case you have to call up and get it sorted out. Losing one of 20 identical $500 payments is going to be a nightmare,
Since this got reupped, the Roth IRA horse race is no longer valid. I still use it as a strategy to unload $500 VGC. If I open up a non-Amex credit card between now and Christmas, I may purchase $1000 VGC at Simon and use this to pay January 2020 estimated taxes.