How Do Taxes Affect My Credit?

How Paying Tax Can Affect Your Credit Score
How Paying Tax Can Affect Your Credit Score

When you are focused on improving your credit, paying on time and avoiding high amounts of debt will help you build a great credit rating. If you are not paying your taxes, or you use personal loans or credit cards to pay your taxes, your tax bill is something that could have a devastating impact on your credit rating. Missing a deadline for tax payments to the IRS could even result in a tax lien.  Here are some ways taxes can affect your credit:

What is a Tax Lien?

If you fail to pay your taxes, the IRS can file a federal tax lien with the credit bureaus. This will dramatically impact your credit rating. The IRS usually files a lien if you owe more than $10,000 and you have not paid for at least 30 days. If you end up with a lien from the IRS, you can end up with 100-point hit to your credit rating; enough to take your score from good to poor and significantly affect an individual’s financial history.

IRS Payment Plans

The best way to avoid a tax lien is to pay your taxes on time. If you do fall behind, one option the IRS provides is a payment plan for individuals to pay their taxes. The IRS will automatically debit your account each month until you have paid off the entire balance owed. If you enroll in the payment plan, you can have the lien removed by asking the IRS to take it off your credit report. Payment plans with the IRS will not reflect on your credit rating, but if you are late with payments to the IRS, they can reinstate the lien which will then negatively affect your credit.

Personal Loans

Some people choose to take out a personal loan to pay their back taxes. If you decide to go this route to pay your taxes, keep in mind that you will need to pay interest on the loan which could compound and result in a much higher total owed depending on the interest charged. To be approved for the loan, you must meet the credit requirements of the lender. When they pull your credit report, a failure to pay your taxes will appear on your credit report, which will affect the interest rate at which a loan is extended to you or even prevent you from getting a loan at all. If you are late to make payments, your credit rating will be impacted. Defaulting on the loan, like failing to pay your taxes, will drastically hurt your credit score. That said, the interest from an IRS installment plan may accrue more quickly than the interest on a loan. Carefully consider if using a personal loan to pay your taxes is the best decision, and consult with an R&G Brenner tax professional if you need help deciding what would be right for you.

Credit Card Payments

Another way your tax bill can impact your credit rating is if you use a credit card to pay your taxes. Credit cards come with certain interest rates, which can increase your debt burden. The interest of a credit card can end up causing you to pay more money than you initially owed in taxes. Like a personal loan, missing payments on your credit card can hurt your credit score. Credit cards add to your debt burden, which can hurt your credit rating if you end up borrowing too much. Having a high balance on your credit cards can even prevent you from raising your credit score. If your credit rating is severely impacted, you can have a hard time getting approved for other loans, and it can even hurt your ability to find a job.

R&G Brenner usually suggests taxpayers try to take advantage of payment programs offered by the IRS, before other options as they usually are the most beneficial to the taxpayer.  However, it is important to consider all different options available when paying your taxes so taxpayers do not end up unnecessarily struggling with higher amounts of debt.

What Are the Next Steps If I Missed the April 15th Deadline?

Did You Miss The Deadline?
Did You Miss The Deadline?

Tax season is always a stressful time of the year.  Regardless if someone files themselves or hires a professional, nobody relishes the thought of having to file their taxes. Most people manage to get their taxes filed before the deadline, but there are always some who cannot get their taxes filed on time and don’t file an extension. 

The April 15th deadline for filing taxes for the 2013 tax year has passed. This sounds serious, but don’t panic. While you may incur some penalties for failing to file on time, acting quickly can help ensure that they won’t be too severe. If you have extenuating circumstances that prevented you from filing your taxes on time, you may even be able to get your penalties abated. Here’s what you need to know for filing your taxes after the deadline:

Your Refund Will Be Unaffected

If you are getting a refund, don’t worry, it will be perfectly safe. Unclaimed refunds can only be forfeited after three years, but the IRS won’t impose any penalties on your refund if you file late. The worst that can happen is that you will receive a refund later than you would have if you had made the deadline, and the IRS does not pay interest.  There is nothing gained from having the IRS hold onto your refund, so if you are due a refund, file a tax return as soon as possible.

Penalties for Filing and Paying Late

The penalty for filing your taxes after the deadline is five percent of the unpaid tax bill for every month your tax return is late. These fines and penalties will not exceed 25 percent of your total bill, however. The penalty for failing to pay any taxes that you may owe is one-half of one percent of the unpaid balance.

If you owe taxes that you cannot pay, you should still file as soon as possible, and set up a payment plan to pay off what you owe in installments to minimize penalties. You can also pay a partial amount when you file to lower the balance—it’s a good idea to pay as much as you can. The important thing is that you make an effort and do your best to stick to any payment plan that you set up. Keep in mind that you will most likely need to fill out additional paperwork if you owe more than $50,000 and wish to pay in installments. The IRS will want to see financial statements to ensure that your payment plan is realistic.

Filing an Extension

While it is too late now to request an extension, for future reference you can receive a six-month extension of the tax deadline by filling out Form 4868. This will give you more time to file your taxes, but it won’t give you more time to pay any taxes that you may still owe. Still, it can help you avoid any penalties that come from filing late.

Whatever you do, you should never decide not to file or pay your taxes. You might be afraid of the penalties that come from missing the April 15 deadline, but the penalties for not filing at all are much worse. The most important thing is that you file, even if you file much later than the deadline. Your chances of getting into real legal or financial trouble become much greater the longer you wait to pay what you owe to the IRS.