April 10th, 2012

Taxes and Your Credit

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April 17 is fast-approaching, and your 2011 tax return will be due before you know it. While you probably know that paying taxes late or not paying at all can cause you a lot of trouble down the road, you might not realize that it can also impact your credit. How? Here, we’ll cover a few little-known facts about taxes and credit.

You can pay your taxes with your credit card.

If you owe the government this year, you might be tempted to pay your tax bill with your credit card if you don’t have the cash saved, or even just to earn rewards points or cash back. While the IRS is more than happy to accept your credit card payment, you will be charged a credit card processing fee of 1.89 to 2.49 percent. If you have no other payment alternative, or your rewards benefits outweigh the processing fee, paying with your credit card might be a good choice.

Tip: Putting a large sum of money on your credit card will affect your credit utilization rate, a significant factor in your credit score. It’s best to keep your credit card balances below 30 percent of your overall limits, so keep that in mind if you choose this option. Check your free credit score to see how your current credit utilization rate is affecting your credit health.

Your credit card rewards points may be taxable.

In some instances, you may be required to pay taxes on extra rewards points or cash back that you received from your credit card issuer as a sign-up bonus. How do you know if you’re rewards are taxable? The Street gives some good guidelines in this article. Essentially, rewards that are taxable are sign-up bonuses worth more than $600 that don’t come with spending thresholds attached.

Tip: Need to know if any of your credit card sign-up bonuses are taxable? Answer the following two questions: 1. Was my bonus valued at more than $600? 2. Was there no spending threshold I had to meet in order to receive my bonus? If you answered “yes” to both, your bonus is likely taxable. Contact your credit card issuer to get more information.

An unpaid federal tax lien will remain on your credit report indefinitely.

Some people believe that a tax lien, like other public records, will remain on a credit report for just seven years. This isn’t in the case when it comes to money owed to the government; it will remain on your credit report until it is paid. Fortunately, you have several payment options before a tax lien is added to your credit report. If you fail to pay your taxes, the government will send you a bill and you’ll have ten days to pay it. Remember that the IRS offers several payment options that could help keep a tax lien at bay. If your debt goes unpaid after that, the IRS may file a tax lien against you. You can see how a tax lien might affect your credit score with our Credit Simluator.

Tip: If you have a tax lien on your credit report, the best way to get rid of it is to pay your debt. The IRS will release your lien within 30 days of receiving your payment. Read more about tax liens and how they can affect you and your credit at the IRS’ website.

Disclaimer: All information posted to this site was accurate at the time of its initial publication. Efforts have been made to keep the content up to date and accurate. However, Credit Karma does not make any guarantees about the accuracy or completeness of the information provided. For complete details of any products mentioned, visit bank or issuer website.


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