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Taxes don’t directly impact your credit. However, how you manage your tax debt and pay your taxes can have an impact on your credit history and score indirectly. Find out more about taxes and credit below, including whether filing a tax extension can hurt you.
In This Piece
- How Is Your Credit Affected When You Don’t Pay Your Taxes?
- How Paying Your Taxes Can Affect Your Credit
- How to File a Tax Extension and if It Is Right for You
How Is Your Credit Affected When You Don’t Pay Your Taxes?
Your tax debt doesn’t directly impact your credit or credit score. The IRS doesn’t report to the credit bureaus directly. However, not paying your taxes can lead to a tax lien that can lead to an eventual impact on your credit history.
Tax Liens and Your Credit
In many cases, if you fail to pay your bills or debts, creditors report that information to the credit bureaus. The negative marks show up on your credit history and are factored into your credit scores. Since payment history is the biggest factor in your credit score, late payments and defaults can seriously impact your score.
However, tax debt doesn’t work the same way. The IRS doesn’t report your tax debt as a line item on your credit report. That’s true whether you pay your bill on time or not.
However, if you do fall behind on your taxes and the IRS starts collection procedures, it may eventually create a tax lien. This is a lien indicating the IRS has an interest in your property, such as your home. If you sell your home, the IRS can take any profits from that sale to cover your tax debt.
Liens are public records. They used to show up on your credit report, but today, the only public records that show up on credit reports are bankruptcies. This doesn’t mean, however, that tax liens won’t hurt your ability to get credit. Lenders, particularly mortgage lenders, may check other public records when considering you for a loan.
Note that tax liens are different from levies. Liens put the IRS in line for receiving payment when your property is sold. Levies allow the IRS to take the property. For example, the IRS may levy your bank account if you owe taxes and haven’t paid them.
How Different Ways of Paying Your Taxes Can Affect Your Credit
Here’s a look at how various methods of paying your taxes can impact your credit.
If You Pay Your Taxes with IRS Payment Plans
The IRS offers a number of payment plan options that you may qualify for if you can’t afford to pay your taxes right away. These payment plans don’t directly impact your credit, as the IRS doesn’t report these payments to the credit bureaus either.
However, the payment plans do involve making a monthly payment to the IRS. The amount of that payment depends on how much you owe in taxes and how long you have to pay it. For example, if you owe $5,000 and are paying it off in a year, that’s $417 a month. If you struggle to come up with that money monthly, though, you might end up putting other bills off—and those late payments could be reflected on your credit report.
If You Pay Your Taxes with a Personal Loan
Some people take out a personal loan to pay off taxes. This method can impact your credit in a couple of ways:
- Hard inquiry. The hard inquiry on your credit report that comes when you apply for a personal loan can cause your score to dip a little temporarily.
- New credit type. Adding a new type of credit to your history can increase your credit mix, which may help boost your score.
- Payment history. If you make the personal loan payment on time, you may build up a positive credit history over time. That’s good for your score. The opposite is true if you miss payments.
If You Pay Your Taxes With a Credit Card
If you have enough of a credit limit, you might pay your taxes with a credit card. This can impact your credit by increasing your credit utilization. A high credit utilization can reduce your credit score. Additionally, if you miss a payment on your credit card, that will result in a negative mark on your credit history.
How to File a Tax Extension and Is It Right for You?
Many people get to April without having all the information they need to correctly file their tax returns. You can request an automatic extension for your tax return by completing Form 4868, which is the Application for Automatic Extension of Time to File U.S. Individual Income Tax Return.
Does filing a tax extension hurt you? Not at all—the IRS automatically grants these requests, moving your tax return deadline to October of the same year.
However, the extension is only for your return. It doesn’t extend the deadline for paying your taxes. If you owe taxes, penalties and interest can still add up if you don’t pay them in April.
Stay on Top of Your Credit
The best way to know what impacts your credit is to stay on top of it. Consider signing up for a service like ExtraCredit to keep an eye on your FICO scores and credit reports.
The post Does Filing a Tax Extension Hurt Your Credit? appeared first on Credit.com.
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