Your taxes are due by April 17 this year. There’s a lot of preparation that goes into being ready to submit your return. From assessing your current debts to avoiding tax offsets, it’s important to know everything about how your credit plays into your taxes.
Are you ready for the 2017 tax season?
It’s right around the corner, and you’ll want to prepare yourself now!
Filing Your Taxes
You need to file your taxes. It’s also important to keep good on anything you owe to the IRS, as leaving an unpaid debt can result in serious damage to your credit score. This is because the federal government will opt to place it on your credit report.
Tax liens are no laughing matter. You can see your FICO score drop by more than 100 points. It can destroy even the best of borrowers; thankfully, you can submit a removal request to get the lien off your credit report.
There’s no guarantee your credit rating will improve after the lien is taken off your report. It can still weigh on your score calculation for up to seven years. Your best bet is to plan ahead of time if you expect to owe the IRS money. It’s usually possible to set up a repayment plan and avoid the credit-damaging implications altogether.
Before You File
Go over your credit report and all your outstanding debts. Figure out if you have any debts that could be taken via tax refund garnishments. Further, make sure you don’t have any judgments against you with bank levy approval. It will put all your funds at risk of seizure and, unfortunately, creditors tend to target your tax refund deposit.
Here are five quick questions to ask yourself before filing:
- Do you owe the IRS anything? If so, read up on the IRS’s Payment & Installation Agreements to avoid losing a large lump sump out of your refund.
- Do you have other federal or state debts? If so, negotiate a repayment plan to avoid wage garnishment — check your state’s laws first.
- Did you default on student loan recently? If so, it can lead to a student loan tax offset, which means a smaller refund for you.
- Did you avoid paying any fines or tickets? If so, the result varies by state, but some cities go as far as adding it onto property tax bills.
- Are you planning to file for Chapter 7 bankruptcy? If so, you might want to do it now — you’ll get your 2016 tax year refund, but nothing next year.
This is just the premise of what you should consider before you do your taxes. A more complex approach will be necessary if you answered “YES” to any of these questions.
Warning: Your spouse’s financial safety can be put at risk if you owe. If no settlement is made on your debts with the IRS and you filed together, the right to garnish tax refunds and wages will apply for your partner also. Things will get even more confusing if you live in one of the common-law states, but that’s a whole different topic.
Your Tax Refund
In 2015, the IRS reported that 83 percent of American taxpayers received a tax refund. Some did not, due to making too much through the year. However, it’s fair to conclude that the typical average credit borrower did receive at least some money back.
A lump of cash is the perfect kickstart toward your credit recovery goals. If you receive anywhere near the average tax refund amount ($2,701 in 2015), it will make a huge difference.
How Does Debt Impact Your Tax Refund?
Any bad debts, such as accounts in collections, can cause you significant financial troubles. In some cases the creditors might succeed at garnishing part of your wages. A creditor can even go as far as emptying your bank account if the court approves a bank levy request.
The creditor has the right to remove up to 100 percent of the amount owing.
Before filing your taxes, make sure any debt disputes are in order. Collection agencies look at tax season as “go time” for planning and executing wage garnishments.. If you have anything in your bank account, a court-approved levy could take it all.
What You Don’t Have to Worry About …
Do you have an annoying creditor that wants you to pay off a debt now?
Are discussions about repayment plans not leading anywhere?
If so, a typical creditor needs to take you to court and get a judgment against you. This will take a while, and chances are you’ll receive your tax refund before it’s done.
The majority of tax refund garnishments occur because of back taxes, child support and other legal judgments. Wage garnishments are a bit less complicated than bank levies, but they still require court approval first.
Take Advantage of Your Tax Breaks
It’s important to educate yourself on all the ways you can reduce what you owe and increase what you get back on your taxes. Not every tax break will help you, and sometimes what seems like a fair claim won’t get approved.
Regardless, below are some tax breaks and deductions worth noting:
- Deduct card convenience fees on tax payment (saves up to 2.5 percent)
- Reduce taxable income by $2,500 over student loan interest
- Save up to $3,000 on each “bad debt“
- Take off certain legal fees involving child support, tax advice and more
To see more potential tax deductions, check the IRS’s Miscellaneous Deductions for the 2016 tax year. This covers the lucrative savings that many Americans fail to notice. If you want to run through the basic deductions, read the IRS’s page on Credits & Deductions for Individuals.
A Note for Homeowners
Things get more interesting if you’re a homeowner.
You’ll need to be careful when managing Private Mortgage Insurance (PMI). It’s essential if you don’t have at least 20 percent to put down on a purchase or refinance. When you reach at least 20 percent equity in your home, it’s no longer needed.
You might be underestimating the expensiveness of PMI premiums. It doesn’t just add a cost but rather, it takes away from affording other expenses. Hundreds, if not thousands of dollars, can be wasted. Your goal should be to remove the insurance as soon as you meet the equity requirement.
You may have the right to deduct your mortgage insurance premiums. Tens of millions of Americans can, and yet very few homeowners do. The biggest requirement for claiming a PMI tax deduction is having an adjusted growth income (AGI) of less than $100,000 for the 2016 tax year.
This tax break is meant for struggling families that own homes. It’s a small savings, but everything helps. The U.S. housing market is going up, and this is freeing more equity for the average homeowner. Keep an eye on your situation, because removing the PMI premium could be possible if the market increases the equity in your home.
Credit Repair and Taxes FAQ
1. Can the IRS Garnish My Wages/Tax Refund?
The IRS, within federal guidelines, has the right to garnish your tax refunds and wages to recuperate funds owing from previous years. Most of the time you can set up a payment plan to alleviate the situation before it escalates.
2. Can Child Support Debt Impact Your Tax Refund?
The state government can garnish any remaining funds on your tax return to cover what’s owed on your child support bill. This can continue until it’s paid off; likewise, there’s a risk of wage garnishment when you deal with child support debt.
3. How Will a Student Loan Affect Your Tax Refund?
The only real risk exists if you have defaulted on a student loan debt. This gives the federal government the power to garnish funds via a tax offset. Your significant other, if you filed together, could also have funds taken from their tax return.
4. Will a Tax Lien Hurt Your Credit Score?
Yes. As mentioned earlier, you can see your score drop by more than 100 points if there’s a lien against you. The only fix for this is to request its removal once you pay what’s owed, but it will continue to impact your credit for up to seven years.
5. Are Credit Repair Services Tax Deductible?
This is one of the tax deductions that slips by most Americans. If you get credit repair assistance, there are some components that will be tax deductible. The main write-offs are for attorneys, such as when dealing with bankruptcy or identity theft.