Most people disdain a steep credit card or tax bill, but few fully appreciate the myriad ways that taxes and credit are intertwined.
To get a better idea of the overlap, we talked to Ken Lin, CEO of CreditKarma.com. He provided the following four examples you’ll want to be mindful of:
1. Paying your tax bill late could damage your credit score.
Just like your electricity and cable bills, falling behind on your tax payments could drag your credit score down. That’s because the government could file a tax lien against you for taking too long to pay your bill. Since a lien is public record, it goes straight to credit reporting agencies and could stay on your credit report for as many as seven years, Lin warns. If your bill’s too much to handle, be proactive and work out a repayment plan with the IRS instead.
2. Paying your taxes with your credit card will cost you.
“When facing a hefty tax bill, many Americans might be tempted to pay their taxes with a credit card, if only to earn the reward points,” Lin says. But before you fork over that plastic, keep in mind that the IRS will charge a processing fee of anywhere from 1.89% to 2.49% of the payment.
“That means if you owe $US10,000 in taxes, paying it on a credit card would cost you an additional $US249 — well above the probable value of the credit card rewards earned,” he notes.
3. Your credit card reward point “gifts” may be taxable.
Keep in mind that some of those sweet sign-up bonuses and rewards that credit card companies have been using to bait new customers may be taxable. It all depends on how they were earned, Lin says.
“Traditional rewards that are accumulated because of purchases made with credit cards are tax-exempt,” he says. “But rewards that are not tied to purchases, like cash or miles bonuses for opening a new account, are taxable as the IRS views them as ‘taxable property windfalls.'”
4. You’ll pay taxes on your relieved debt.
You might thank your lucky stars if a credit company decides to write off your debt, but remember that the IRS will consider that taxable income. “It’s the same way with debt settlement,” Lin says. “The remainder of the debt that you settled is subject to taxation.”