Tuesday, February 14, 2006

Using Credit Cards To Pay Taxes

It is a good thing that I read the article from USA Today about using credit cards to pay off your taxes. I finished my first pass at my taxes a week ago and found that I owe the government about $6000 this year. This is the second year in a row that my wife and I owe that much. Very depressing. I was planning on paying that balance with my American Express Blue card just so that I could get a few extra bucks from the cash back (I think that it is 1% on most purchases). After reading the article, I found out that would not have been a very good idea. Apparently, if you use a credit card to pay your taxes, you get charged a processing fee of almost 2.5%. That would have hurt, I would have gone in thinking I was making $60 and ended up being charged $150. As if it isn't bad enough that we owe $6000, we would have owed an extra $90.

As for the reason that we owe $6000, it mostly has to do with the timing of our housing purchase and our withholding level. We have always had to owe the government money, but it usually wasn't much, about $1000-$2000. Our withholding has always been 2 for me and 1 for my wife. In 2004, we sold our first house that we had lived in for just over 2 years about half way through the year and then moved into an apartment until our new house was done being built. This caused us to miss out on half a year worth of mortgage interest deductions. This is why we owed $6000 last year. We then decided to change our withholding to help on this years taxes...we only moved mine to 1 also. We finally moved into our new house in the Summer of 2005, so we missed out on another half a year worth of mortgage interest. We also were only taxed around $1100 for school and property taxes (land only, they have not assessed the house yet). This once again led to us not having enough deductions and owing $6000.

The question really becomes, what do we do for next year? I always find it very difficult to figure out exactly what we need to do to do come out close to even (I actually would like to owe a little bit each year). I think that we will get money back if we both change out withholding to 0, so we don't want to do that. On the other hand, we don't want to just have one of us change our withholding to 0, that would make it uneven (we still keep separate accounts as well as our joint accounts). Hopefully, just having a full years worth of mortgage interest and taxes will help even it out for us. If anyone has any other ideas that could help out, I would love to hear from you.


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