Do you have unpaid taxes? Please read this article on how unpaid taxes can hurt you.
Don’t worry, we understand – Learning that you owe a big tax bill to the IRS may be overwhelming, not to mention stressful.
If you are making a payment to the government for tax, you may have questions such as whether delaying or not paying the taxes can affect the credit.
While an unpaid tax cannot affect your credit directly, it can have serious negative consequences for your financial situation, which includes hurting the credit scores.
Unpaid taxes do not have a direct effect upon your credit anymore. This has not been the case. Before April of 2018, tax liens were included in credit reports. Now, tax liens do not show up on credit reports, they do not contain any direct impact on your credit scores. But, unpaid taxes can cause you many problems.
Ways How Unpaid Taxes Can Hurt You
You can face serious financial consequences if you fall behind on your taxes. As you will see, some of these problems can harm your credit in an indirect way.
1. You May Face Trouble While Qualifying for a Loan
Your credit reports do not show tax liens anymore, but that does not mean a tax lien cannot cause you issues if you apply for a loan. In particular, when you apply for a mortgage, your lender can perform a public record search to find out whether you’ve any outstanding judgments and tax liens filed against you. Your better bet is to pay off your tax lien before you apply for a mortgage.
Cannot afford to pay the lien in full? Setting up a payment plan with the IRS can be sufficient to satisfy few lenders, if you may prove, you’ve made a sufficient number of consecutive payments. remember that if you set up a payment plan for paying taxes, your lender will add the monthly payment to the IRS into your debt-to-income calculations. This means those lien payments can decrease the size of the house loan you qualify to receive.
2. You’ll End Up Paying More
Like other bills, the taxes have also a due date. That due date is April 15. If you owe an outstanding balance to the federal government and you cannot pay it by this deadline, you can be charged a penalty for not paying all of your taxes on time. To make matters worse, the IRS will usually charge you interest on top of your unpaid taxes as well as penalty fees.
Paying more money in penalties and interest because you sent in your tax payment late can make it further challenging to keep up with the rest of your bills. If this occurs, and if you fall behind on any credit obligations as a result, your late tax payment can indirectly have a negative effect upon your credit. Payment history is the most essential factor in your credit score, counting for about 35 percent of your score, so late credit payments reported by your creditors can damage your credit rapidly.
3. Wage Garnishment/levies
The IRS can garnish or levy your wages. If a wage levy takes place, the IRS site states that part of your wages will be sent to the IRS every pay period unless.
- You make other arrangements for paying the overdue taxes
- The amount of overdue taxes is paid that you owe
- The levy is released.
Part of your wages can be exempt from the levy and the exempt amount will be paid to you. The exempt amount is based on the standard deduction as well as an amount determined calculated in part based on the number of dependents, you’re allowed for the year the levy is served.
4. Credit Cards and Debit Cards
Paying your tax bill with a credit card can be a choice for you, depending on your conditions. However, it is not the first option people consider because of a variety of fees and high tax bills. It is essential to note, paying your taxes with a credit card can be the best choice if you can afford to pay off your credit card bill. If you cannot afford to pay it off, however, your credit score can suffer. Before you start making tax-related payments with a credit or debit card, visit the IRS website to learn about processing fees and actions, payment limitations, and more.
5. Penalties and Interest
The longer you procrastinate your tax bill payments; the extra money you’ll probably end up paying. The IRS will give you what’s called a failure-to-pay penalty if you don’t pay your taxes by the tax due date. The penalty is a recurring monthly charge that you must pay unless you are done paying off your tax bill. Furthermore, to this penalty, you’ll have to pay whatever interest is accruing during the time you aren’t paying your taxes. Over time, you’ll be spending more money than if you were to pay your tax bill on time. Keep in mind that you can receive a different penalty to fail to file your tax return. Consider filing your taxes irrespective of whether you can afford to pay your taxes on time. Filing your taxes can help you avoid the failure-to-file penalty and other tax problems.
6. Indirect Credit Impact
Paying your taxes late can indirectly put your credit in a bind. Late tax payments as well as unpaid taxes cannot show up on your credit reports, but there are ways tax liens may indirectly affect your credit. Paying more money in penalties or interest since you sent in tax payment late can make it challenging to keep up with the rest of your bills. If this occurs, and you fall behind on any credit obligations as a result, your late tax payment can indirectly harm your credit. Payment history is the most essential factor in your credit score, counting for about 35% of your score, so late credit payments reported by your creditors can damage your credit rapidly.
Do Not Ignore the Problem
If you have a tax bill that you cannot afford to pay, ignoring the issue is not the answer. Actually, as penalties and interest continue to climb, pretending such as your tax bill does not exist will make your situation worse. Instead, consider reaching out to the IRS for discussing payment plans and other tax relief options. If your credit is in decent shape, you can even be able to qualify for a personal loan to cover your tax bill at a low-interest rate than the IRS will charge.
Remember that even if unpaid taxes do not hurt your credit, they can yet make your life a lot extra stressful. Addressing your tax issues head-on, either on your own or with the help of a reputable tax professional, is your better move.
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