Taxes

How Taxes Can Impact Your Credit

It’s that season, and we are all (hopefully) eagerly awaiting our tax refund.

There are a few cautions regarding the impact of taxes on your credit.

1. Adding New Debt to Pay for Taxes

Creating additional debt to pay your tax obligation will probably show up on your credit report.  In the long run, it is far better to show a loan on your credit, than a tax lien, but it is still worth noting that the loan to pay your taxes may have an adverse impact on your credit score.

2. Quick Refunds

Tax Preparers and others provide a “Quick Refund”  which is really a loan, and usually a loan with very high interest.   Often, you will be offered a larger loan as a line of credit at the same time.  Some providers, like H&R Block, will report that loan, and any late payments to credit agencies.

3. Tax Liens

If you owe too much to the IRS, and can’t pay it back, you might be facing a Tax Lien.  This will have a horrendous impact on your credit scores.  If you get a tax lien, paying it as quickly as possible (assuming the rest of your credit is good) will improve your scores again.

4. Bankruptcy because of taxes

Your tax debt is not forgiven in bankruptcy, however, if you file for bankruptcy for relief from your other debts, in order to pay your tax bill, expect an extreme negative impact on your credit score for 7 to 10 years!

5. Identity Theft.

The IRS reports you got your refund, but it’s not in your account??  You probably are the victim of identity theft.  Identity theft has run rampant in recent years.  While there are means of cleaning up your credit after identity theft, you can expect a long and tedious process will ensue.


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