Taxes and Your Credit – Are you ready?

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!

Taxes and Your Credit

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:

  1. 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.
  2. Do you have other federal or state debts? If so, negotiate a repayment plan to avoid wage garnishment — check your state’s laws first.
  3. 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.
  4. 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.
  5. 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:

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.

Sources:

https://www.irs.gov/uac/tax-refund-withholdings-and-offsets

https://www.irs.gov/pub/irs-pdf/f12277.pdf

https://www.irs.gov/individuals/payment-plans-installment-agreements

https://www.garnishmentlaws.org/

https://www.irs.gov/uac/newsroom/tax-refunds-reach-almost-125-billion-mark-irs-gov-available-for-tax-help

http://www.cpapracticeadvisor.com/news/12116556/average-income-tax-refund-for-2015-increased-to-2701-irs-caught-908-million-in-fraudulent-refunds

http://www.bankrate.com/finance/debt/3-ways-to-fight-a-creditor-s-account-levy.aspx

https://www.irs.gov/uac/credit-and-debit-card-fees-related-to-tax-payment-are-deductible

https://www.irs.gov/taxtopics/tc456.html

https://www.irs.gov/taxtopics/tc456.html

https://www.irs.gov/taxtopics/tc453.html

http://www.forbes.com/sites/robertwood/2015/03/19/which-legal-fees-can-you-deduct-on-your-taxes/

https://www.irs.gov/pub/irs-pdf/p529.pdf

https://www.irs.gov/credits-deductions/individuals

https://www.irs.gov/publications/p936/ar02.html

https://turbotax.intuit.com/tax-tools/tax-tips/General-Tax-Tips/Federal-Guidelines-for-Garnishment/INF14841.html

How Long Does It Stay on My Credit Report?

If your credit report includes some negative items, it’s important to know how long they will remain there. Every negative mark on your credit report has some impact on your overall credit score, so the sooner a negative mark no longer shows up, the better. If you’re trying to improve your credit score, take a look at some of the most common types of negative items and how long they will stay on your credit report.

Credit Report Lifetime

Late Payments

If you paid a debt more than 30 days late, your creditor may have reported it to the credit bureaus. It will take about seven years from the date of your late payment for it to come off your report.

A payment that was 90 days late affects your score more negatively than a payment that was 30 or 60 days past due. In addition, the older your late payment is, the less it affects your credit score. So while it might take seven years to get a late payment off your report, its impact will gradually lessen as you get closer to that seven-year mark.

Collections

Any debts you haven’t paid on time may go to collections, and these will stay on your credit report for seven years plus 180 days from the date of the first missed payment. Even one account going to collections will reduce your credit score, as will any subsequent accounts that you leave unpaid. Even after you pay an account that has gone to collections, it may remain on your credit report unless you contact the creditor or a credit repair agency for help removing it.

Charge-Offs

Many creditors decide that your debt is a lost cause once your payment is more than 120 days late, so they mark it as a charge-off. Essentially, it’s a negative item on your credit report at that point, and it will stay there for seven years plus 180 days from the date of the first missed payment. This is the case even if you pay this debt off eventually. Keep in mind that you may still owe the debt after it has been charged off, because the creditor can still sell it to a collections office that will contact you for payment.

Bankruptcy

The amount of time a bankruptcy stays on your credit report depends on the chapter you filed. For a discharged chapter 13 bankruptcy, it will stay on your report for seven years, since you had to repay at least some of the debt you owed. For chapter 7 or 11, the bankruptcy will show up for 10 years, since debts are not repaid with these chapters.

Foreclosure

Before you foreclose on a home, you should know the foreclosure will stay on your credit report for up to seven years from the date you file. This timeline also applies to a short sale, which will be reported as a negative mark on your credit report and will therefore make it more difficult for you to buy another house for at least seven years.

Tax Liens

If you have a tax lien on your credit report due to not paying your taxes, this negative item will remain on your report for up to seven years after the IRS filed it. This is the case even after you’ve paid it off. If you want it to come off sooner, contacting the IRS to see if you qualify for withdrawal of the lien. This is a good step to consider if you need to get a loan or mortgage soon and do not want an old tax lien affecting your credit score and thus your chance of obtaining the loan or mortgage.

Inquiries

Credit inquiries may show up as negative marks on your credit report, but they’re not as damaging to your score as many of the other negative items discussed above. In fact, soft inquiries do not damage your credit score at all. An example of a soft inquiry is when a current creditor reviews your account to see if you’re eligible for a better interest rate or increased credit limit. Checking your own credit score is also a soft inquiry.

On the other hand, hard inquiries occur when you apply for a new credit account, such as a car loan or credit card. This will damage your credit score slightly, but only for up to one year. Luckily, the effects of either type of inquiry are minimal, since inquiries stay on your report for up to two years.

Clearly, with most types of negative items on your credit report, the magic number is seven. So any time you make a mistake when it comes to your finances, you could be suffering the consequences for the next seven years. The good news is that you may be able to reduce the amount of time the typical negative mark stays on your report, because you have the option of hiring a credit repair company to help. This could get items removed much sooner and is worth looking into if you plan to make any big purchases soon that require you to have a good credit score.

Sources:

https://www.credit.com/credit-reports/late-payment-secrets-revealed/

http://blog.equifax.com/credit/faq-how-long-does-information-stay-on-my-credit-report/

https://www.credit.com/credit-repair/how-long-do-things-stay-on-your-credit-report/

http://www.experian.com/blogs/ask-experian/how-long-do-paid-public-records-remain-on-your-report/

Repair Credit: Results in Months Not Years

repair credit now

Full credit repair is no seven-year journey; with the right efforts, you could increase your FICO score by more than 100 points in just six to eight months.

If you’re trying to repair credit problems, don’t turn to bankruptcy. In fact, even if you’re unsure how to repair credit, the best route is debt management.

Take a look below for more details on what actions you should take, which include: using secured credit cards to repair credit, fixing credit report errors to remove penalties, shifting away from heavy revolving debts and taking credit limit increases when possible.

How to Improve My Credit Score

In less than a year, you can go from bad to great credit. It’s just going to take some work. That means building new credit, paying old debts and fixing any delinquent accounts. But if you have bad credit, how exactly will you do this?

The best thing you can do is forget everything you thought about secured credit cards. It’s never a good route if you have other options – but a secured card works wonders when you’re trying to repair credit.

How to Repair Credit with a Secured Card

It’s simple – get a secured credit card in your name and start using it. After 12 to 18 months of responsible paying, the card issuer will upgrade you. Some cards only increase in security funds and others switch to unsecured cards.

Aim for the latter and shoot for the highest credit limit you can get – the bigger the collateral you can provide, the better. The best convertible secured credit cards allow for a $5,000 to $10,000 secured credit limit.

The only other thing is to avoid using the secured card for all your monthly expenses. It’s not good to be that active – after all, the more debt you carry on the card, the worse your credit utilization rate will be. This is an important variable to keep under control; your outstanding debt levels amount for 30 percent of your FICO score calculation.

Building Credit by Fixing Errors

Another way to see a fast increase in points is by fixing errors on your credit file. If there’s an inaccurate entry, it could plague your score by 100 points or more. In fact, a FTC study from 2013 found that 1 in 250 consumers have a 100 point or higher deficit due to reporting errors. Beyond that, another 1 in 20 files contain errors amounting to lower scores by 25 points or more.

You can request a copy of your credit report from each bureau individually, or through the AnnualCreditReport.com website. Take a look at it for any signs of inaccurate or missing information. If anything is spotted, when the bureau acts on it your new FICO score will be higher.

You can report errors on your file through the credit bureau websites. TransUnion also lets you send your report by mail. It’s best to contact all three, but once you notify a single bureau they’re obligated to tell the others. If the issue is due to identity fraud, and not a recording error, then an FTC affidavit and police report might be required.

Consolidating Your Revolving Debts

Revolving debts weigh more on your credit score than installment debts. This means short-term loans can help. If your credit card debts are high, you could use a consolidation loan to lower your debt-to-credit ratio. The installment debt created by your loan won’t drag your score as much, so your score will go up once your file updates with the change.

This is why debt repair services are actually a hidden gem. You can avoid bankruptcy and pay back what you owe on your own schedule. In the end, you might be able to repair your credit score within six months to a year. It’s just a matter of organizing your debts and optimizing your file based on how FICO calculates your score.

Take Any Limit Increase You Can Get

When you are offered a higher credit limit it means you’re given the chance to take on even more debt. This shows that you’re trusted with a higher amount; until you spend it, your debt-to-credit ratio will be improved.

Therefore, taking on credit limit increases as they come is a fantastic idea. It’s just a matter of having the willpower to not blow all the new funds. Long story short, if you can manage this, then the greater credit limits will help boost your credit score.

Conclusion

Credit repair is a scary subject – where the only happy ending seems to come after you go through bankruptcy or if you win the lottery. This doesn’t have to be the case, and there are ways around bankruptcy, but it will take a real commitment.

The journey begins with figuring out what you’re doing wrong as a borrower. In most cases, it’s carrying too large of a debt on credit cards. Deleverage this by getting access to loans and by consolidating your high-interest debts.

Then work on sustaining the best credit utilization rate you can manage. Your FICO score will show real changes after only three to six months of good stats getting reported to the credit bureaus.

Sources:

https://www.ftc.gov/news-events/press-releases/2013/02/ftc-study-five-percent-consumers-had-errors-their-credit-reports

http://www.myfico.com/crediteducation/amounts-owed.aspx