This Often-Overlooked Way to Fund Your Roth IRA Has Many Advantages

A Roth IRA is a uniquely powerful retirement savings tool, because you won’t pay taxes on the money you withdraw during retirement. An annuity is a way of generating guaranteed income. Put them together, and you have a powerful retirement protection tool that can provide guaranteed income for life, with a big plus: It’s completely tax-free.

Anyone may roll over part or all of an existing Roth to a Roth annuity.  You may transfer all or part of the funds in an ordinary Roth to a Roth annuity. While there are income and contribution limits for new money going into a Roth IRA, they don’t apply to rollovers — including rollovers to a Roth annuity.

Different types of annuities accomplish different things and have distinct pros and cons — like the Swiss army knife of personal finance. Since they’re so varied, one type or another can work well for a Roth IRA.  Investment choices, fees and contract provisions vary, so work with an annuity agent who will educate you about your choices and clearly lay out the pros and cons.

What kind of annuity works for a Roth? It depends on which stage of your financial life you’re in. In the accumulation stage, you’re building wealth for retirement. In your decumulation stage, you’re retired and receiving income from your savings.

Here’s how Roth annuities can work in each stage.

Building wealth for those approaching retirement

One attractive option is a fixed indexed annuity. With the stock market continuing to break records, it may be vulnerable to a major long-term downturn. When you’re young, you can ride out the ups and downs. But if you’re in your 50s or 60s, you may want to get growth potential without taking the risk of losing Roth money you’ll need during retirement. If so, an indexed annuity might be a good choice for you.

It pays interest based on an underlying market index, such as the S&P 500 or the Dow Jones Industrial Average. While the interest earnings are locked in, up to a stated cap (you may not get all of the upside) each year, you’ll never lose money when the index declines.

While indexed annuities are linked to one or more underlying market indexes, their value does not vary from day to day. Instead, they pay a varying amount of interest that is credited and locked in each year on the anniversary date of the contract. Since equity markets can be volatile, indexed annuities are designed to be held long-term, whether yoked to a Roth IRA or not.

A fixed-rate annuity — also called a multi-year guarantee annuity, or MYGA — is a more conservative choice. It works like a bank CD, paying a set interest rate for a set period. Fixed-rate annuities these days pay much more than CDs of the same term. As of April 2021, you can earn up to 2.90% a year on a five-year fixed-rate annuity and up to 2.25% on a three-year contract, according to AnnuityAdvantage’s online rate database. The top rate for a five-year CD is 1.25% and 1.05% for a three-year CD, according to Bankrate. 

Fixed-rate annuities can play a key role in asset allocation. Let’s say you decide to split your Roth assets up 50-50 between equities and fixed income. A fixed-rate annuity can give you a much higher rate of interest than you’d get today with safe fixed-income alternatives, such as CDs and Treasury bonds.

For current annuity rates, see this online annuity database. Interest is paid and compounded annually.

How to get tax-free lifetime income during retirement

Other than a traditional employer pension or Social Security, an income annuity is about the only vehicle that can guarantee an income for as long as you live. And by combining an income annuity with a Roth, that income is tax-free.

If you need income from your Roth very soon, consider an immediate income annuity. You can open a Roth annuity with a single payment (such as a tax-free rollover from an existing Roth IRA) to an insurance company. The insurer in turn guarantees you a stream of income. You can choose how long the payments will last — for instance, 15 years. Most people, however, choose lifetime payments as “longevity insurance.”

You can receive your first monthly income payment a month after your annuity contract is issued.

If you’re married, consider the joint-income option. With it, your spouse will receive regular monthly income payments for the remainder of his or her life too. Payments to a surviving spouse are always tax-free.

If you don’t need income right now, consider a deferred income annuity. Here, your income stream will begin at a future date you choose. By deferring payments, you let the insurer credit more interest over the years on your behalf, and you’ll ultimately get more monthly income. For instance, by delaying lifetime annuity payments from age 65 to 75, you’ll get about 85% to 90% more each month. On the other hand, you and/or your spouse won’t receive the deferred payments as long.

Another option is an indexed annuity with an income rider. The rider guarantees a certain income regardless of the performance of the annuity. It provides income like a deferred income annuity, plus the potential upside of an indexed annuity. It’s sometimes called a “hybrid” annuity.

The downside is cost. The rider typically costs about 1% of the annuity value annually. The insurer deducts this amount from your policy.

The advantage is retaining your money. Unlike an income annuity, which typically has no cash surrender value, an indexed annuity with an income rider lets you keep your money while guaranteeing lifetime income, starting on a date you choose.  You thus have flexibility. If you need the money, it will be there for you to withdraw or annuitize. (Wait until the surrender period is over to avoid any penalties.)  If you don’t need the money, you can pass on any remaining value to your heirs.

Is the extra cost worth it?  It all depends on your situation and goals and your desire to leave money to your heirs.

Whether you’re saving for future retirement or are currently retired or soon will be, annuities offer a range of often-overlooked strategies for the Roth IRA and amplify its advantage of tax-free retirement income.

A free quote comparison service with interest rates from dozens of insurers is available at https://www.annuityadvantage.com or by calling (800) 239-0356.

CEO / Founder, AnnuityAdvantage

Retirement-income expert Ken Nuss is the founder and CEO of AnnuityAdvantage, a leading online provider of fixed-rate, fixed-indexed and immediate-income annuities. It provides a free quote comparison service. He launched the AnnuityAdvantage website in 1999 to help people looking for their best options in principal-protected annuities.

Source: kiplinger.com

3 Things to Do When Your Neighbors List Their Home for Sale

The sign just went up next door. How does your neighbor’s impending sale affect you?

Most people think their real estate concerns end once they’ve closed on and moved into their new homes. But when a neighbor’s house goes on the market, there can be some important implications for you.

Here are some tips for staying real estate aware.

1. Document important disclosure items

For the most part, good fences make good neighbors. But sometimes the folks on the other side of the fence don’t cooperate, and unresolved neighbor conflicts tend to arise when one of the homes goes on the market.

Have a property line dispute? Or an issue with a broken fence and you want the new buyer to know about it? While sellers in most states have a duty to disclose issues to potential buyers, not all areas require this.

Do your new neighbor-to-be a favor and alert the seller’s agent to anything the buyer needs to know about your neighbor’s property.

2. See things differently

Open houses allow buyers to spend some time exploring a home, but these events also present you with a chance to see your home from your neighbor’s perspective.

Once at a busy open house in San Francisco’s Noe Valley neighborhood, an open house visitor made a somewhat obvious beeline for the back of the house. He immediately got on the phone and started talking with someone about where he was standing, giving orders to move left and right.

It turned out this visitor lived in the home behind, and he was checking to see the neighbor’s view into his home.

The open house is your chance to check your home’s paint job from the neighbor’s yard or simply to see your home from a different perspective.

3. Know and learn the market in real time

Typical sellers claim and save their home online, but they also keep searches going after the fact. Why? To keep tabs on the market, see the comps and have a real-time sense of what’s happening nearby.

Just like when you were a buyer, knowing about the area and types of homes in the market is a good move for any homeowner. Take a neighboring home for sale as an opportunity to see what the market bears. You can also learn about the latest trends in home design.

Speaking to a real estate agent can keep you informed of changes to property taxes or how assessments are changing in your town. A smart real estate agent, working their listing, will be an incredible resource to would-be clients down the road. Leverage their experience when your neighbor sells.

Take note when your neighbor goes to sell their home. It’s not just a time to nose around, but to document, inspect or learn from the home sale. Some homes get listed once in a lifetime — take advantage of the opportunity.

Related:

Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow.

Originally published October 31, 2016.

Source: zillow.com

What are derogatory marks and how can you fix them?

Derogatory Marks Header Image

Having a few items on your credit report dragging down your score can be incredibly frustrating, especially if you have a good financial record.

A derogatory mark is a negative item on your credit report that can be fixed by removing it or building positive credit activity. Because derogatory marks can stay on your credit report typically for seven to ten years, it’s important to know how to fix them.

Derogatory marks can affect your credit score, your ability to be approved for credit and the interest rates a lender offers you. Some derogatory marks are due to poor credit activity, such as a late payment. Or it could be an error that shouldn’t be on your report at all.

Types of negative items include late payments (30, 60, and 90 days), charge-offs, collections, foreclosures, repossessions, judgments, liens, and bankruptcies. We’ll cover what each one of these means, and how they can impact your credit reports.

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How do derogatory marks impact my credit score?

The amount that derogatory marks lower your credit score depends on the mark’s severity and how high your credit score was before the mark. For instance, bankruptcy has a greater impact on your credit score than a missed payment or debt settlement. And, unfortunately, having a derogatory mark impacts a high credit score more than it does a low credit score.

According to CreditCards.com and CNNMoney, even a single negative on your credit could cost you over 100 points. Negative items on your credit could cost you thousands of dollars in higher interest rates, or you could be denied altogether.

negative item score decrease stats

How long a derogatory mark stays on your credit report depends on the type of mark.

How long do derogatory marks stay on my credit report?

Derogatory marks usually stay on your credit report for around seven to ten years, depending on the type. After that period passes, the mark will roll off your report and you should start seeing a change in your credit score.

Here’s how long each derogatory mark stays on your credit report:

Type of derogatory mark What is it? How long does this stay on a credit report?
Late payment Late payments are payments made 30 days or more after the payment due date. Typically, this can remain on your report for seven years from the date you made a late payment.
An account in collections or a charge-off Creditors send your account to collections or charge them off if there’s been no payment for 180 days. Typically, this can remain on your report for seven years from the date you made a late payment.
Tax lien A tax lien is when the government claims you’ve neglected or failed to pay taxes on your property or financial assets. Unpaid tax lien: Can remain on your report indefinitely.

Paid tax lien: Can remain on your report seven years from the date the lien was filed.

Civil judgment Civil judgments are a debt you owe through the court, such as if your landlord sued you over missed rent payments. Unpaid civil judgment: Can remain on your report for seven years from when the judgment was filed, but can be renewed if left unpaid.

Paid civil judgment: Can remain on your report for seven years from when the judgment was filed.

Debt settlement Debt settlement is when you and your creditor agree that you will pay less than the full amount owed. A typical time period is seven years, starting from when the debt was settled or the date of the first delinquent payment if there were missed payments.
Foreclosure Foreclosure is when you fail to pay your mortgage and you forfeit the right to the property. Typically, seven years from the foreclosure filing date.
Bankruptcy Bankruptcy is a court proceeding to discharge your debt and sell your assets. Can remain on your report for seven years for Chapter 13 bankruptcy. Chapter 7 bankruptcy can remain on your report for 10 years.
Repossession A repossession is when your assets are seized, such as a vehicle that was used as collateral. Can remain on your report for seven years from the first date of the missed payment.

Types of derogatory marks

Late payments

Late payments occur when you’ve been 30, 60, or 90 days late paying an account. Although you don’t want late payments on your credit reports, an occasional 30 or 60-day late payment isn’t too severe. But you don’t want frequent late payments and you don’t want late payments on every single account. One recent late payment on a single account can lower a score by 15 to 40 points, and missing one payment cycle for all accounts in the same month can cause a score to tank by 150 points or more.

Payments 90 days late or more start to factor more heavily into your credit score, and consecutive late payments are even more harmful to your score, as each subsequent late payment is weighted more heavily. Sometimes, creditors will report payments as late as 120 days, which can be almost as severe as charge-offs and collections. Late payments can be reported to the credit bureaus once you have been more than 30 days late on an account and these late payments can stay on your credit reports for up to seven years.

Charge offs

A charge off is when a creditor writes off your unpaid debt. Typically, this occurs when you have been 180 days late on an account. Charge offs have a severely negative impact on your credit, and like most other negative items can stay on your credit reports for seven years. When an account is charged off, your creditor can sell it to collection agencies, which is even worse news for your credit.

Creditors see a charge off as a glaring indication that you have not been responsible with your finances in the past and cannot be counted on to fulfill your financial obligations in the future. When creditors see a charge off on your credit reports, they are more likely to deny any new applications for loans or lines of credit because they see you as a financial risk. If you do qualify, this can mean higher interest rates. Current creditors can respond by raising your interest rates on your existing balances.

Tax liens

In most cases, liens are the result of unpaid taxes – whether it’s at the state or the federal level. For a federal tax lien, the IRS can place a lien against your property to cover the cost of unpaid taxes. Tax liens can make it difficult to get approved for new lines of credit or loans because the government has claimed to your property. What this means is that if you default on any other accounts, your creditors have to stand in line behind the IRS to collect.

Unpaid liens can stay indefinitely on your credit reports. Once they have been paid, however, they can stay on your reports for up to seven years. Like judgments though, the credit bureaus are strictly regulated on how they can report liens because they are also public records.

Civil judgments

Judgments are public records that are also referred to as civil claims. A judgment can be taken out against a debtor for an unpaid balance. A creditor or collection agency can file a suit in court. If the court rules in favor of the creditor, a judgment is taken out against the debtor and put on their credit reports. This, like many other negative items, has a severely negative impact, and like most other negative items can be reported for seven years.

Judgments are also another indication that a person won’t pay their debts. Lawsuits are time-consuming and costly, so they are something that creditors potentially want to avoid. When a judgment is filed though, it can impact more than credit. The judge may allow the creditor to garnish a debtor’s wages, which can heavily impact finances.

Collections

Collections are the most common types of accounts on credit reports. About one-third of Americans with credit reports have at least one collection account. Over half of these accounts are due to medical bills, but other accounts like unpaid credit cards and loans, utilities, and parking tickets can be sold to collections.

Collections arise from debts that are sold to third parties by the original creditor if a bill goes unpaid for too long. They have a severe negative impact on your credit and can stay on your reports for up to seven years. When potential creditors see collections on your credit reports, it can raise flags and cause them to think that you won’t pay your debts.

Foreclosures

A foreclosure is a legal proceeding that is initiated by a mortgage lender when a homeowner has been unable to make payments. Usually, a lender will file a foreclosure when a homeowner has been three months late or more on mortgage payments.

When a lender decides to foreclose, they begin by filing a Notice of Default with the County Recorder’s Office, which begins the legal proceedings. If a foreclosure goes through and a homeowner can’t catch up on payments, then they are evicted from their home, and the foreclosure is reported to the credit bureaus.

Bankruptcies

Bankruptcy is extremely damaging to credit. Individuals who file for bankruptcy are those who have too much debt, and not enough money to pay it. They likely have had overdue accounts for a long period of time and in some cases loss of income that prevents them from being able to pay any of their bills. Bankruptcies can also arise from huge medical debt.

Whether or not file for bankruptcy is a difficult decision, and doing so can impact your credit from seven to ten years, depending on the type of bankruptcy you file. When a bankruptcy is filed, debts are discharged and the individuals filing are released from most of their previously incurred debts (there are some exceptions). This option can give people a “clean slate” from debt, but creditors don’t like to see it on credit reports because it can imply that an individual won’t pay their debts.

Repossessions

A repossession is a loss of property on a secured loan. Secured loans are where you have collateral, like a car or a house, and the loss occurs when the lender takes back the property because of the inability to pay. Usually, when this occurs, the lender will auction off the collateral to make up for the remaining balance, although it doesn’t usually cover the remaining balance.

When there is a remaining balance, the creditor may choose to sell it off to collections. A repossession has a severe negative impact on credit because it shows a debtor’s inability to pay back a loan. Usually, a repossession follows a long line of late payments and can knock a lot of points off a credit score.

How can I improve my credit score with derogatory marks on my credit report?

If you have derogatory marks, you can improve your credit score by working to rebuild your credit. By boosting your credit score, you’re more likely to get approved for loans and credit cards.

Here’s how to improve your credit score based on the type of derogatory mark:

Derogatory mark What to do to improve your credit score
Late payments Pay off the full debt as soon as possible. If there are late fees, ask the creditor to drop the fee (they often do if it’s your first time being late).
Stay on top of your payments with other lenders to show that you’re responsible, reducing the impact of a late payment.
An account in collections or a charge-off Pay off the debt or negotiate a settlement where you pay less than the full amount owed. Making a payment doesn’t remove the negative mark from your report, but prevents you from being sued over the debt.
Tax lien Pay the taxes you owe in full as soon as possible. Continue to make timely payments with any creditors and lenders.
Civil judgment Pay off the judgment amount, ideally before it gets to court. Make other payments on time to limit the impact of the civil judgment on your credit score.
Debt settlement Pay the full settled amount to prevent your account from going to collections or being charged off.
Foreclosure Keep other credit and loans open and make timely payments to build up positive credit activity.
Bankruptcy Rebuild your credit after bankruptcy with credit cards that cater to lower credit and credit builder loans. Make timely payments to reestablish that you’re a responsible borrower.
Repossessions Continue to pay other bills on time and pay off any further debt to the creditor.

You can also remove derogatory marks if they’re inaccurate or unfairly reported. By requesting your free credit report, you can look for mistakes and inaccuracies.

For example, check to see if a missed payment was inaccurately reported or if someone else’s account got mixed up with yours. You can remove these mistakes, giving your credit score a boost. 

How do I remove derogatory marks from my credit report?

You can remove derogatory marks from your credit report by disputing inaccuracies with the credit bureaus. Here’s how:

1. Request and review your credit report

TransUnion, Equifax and Experian provide one free credit report each year. Request your credit report and review it closely for errors.

Look through both “closed” and “open” derogatory marks. Check to see if your personal information is correct and if the creditor reported payments and dates appropriately. Take note of any discrepancies.

2. Dispute derogatory marks

If you notice incorrect items, payments or dates you need to file a dispute with that credit bureau (and any bureau that lists the item on your report).

You can file a dispute through the credit bureau or have a professional assist you. It’s best to make disputes as soon as you notice them, ideally within 30 days of the incident. The credit bureaus must respond to you within 30-45 days. 

3. Follow up on the dispute

You may have to provide more information or proof to refute something on your credit report. Be sure to respond to any inquiries by the specified time. Check your credit report afterward to make sure that the error is removed.

Removing a derogatory mark from your credit report helps to repair your credit. You’ll also want to improve your credit by doing things like lowering your credit utilization rate, upping the average age of your credit and making timely payments.

If you’re unable to remove a derogatory mark from your credit report, you’ll need to wait until it rolls off of your report, usually within seven to 10 years. In the meantime, work to rebuild your credit and improve your creditworthiness.

steps to remove derogatory marks from credit report

How can I get help with derogatory marks?

You can remove derogatory marks from your credit report by yourself. However, getting help from a credit repair company can make the process easier and improve your chances of getting the negative mark removed.

Many consumers appreciate professional help as it saves time, energy and resources. Contact us for a free credit report consultation. We’ll talk about your unique situation and the ways that we can help you.

Source: lexingtonlaw.com

How Bankruptcy Works & When it’s a Good Idea

Bankruptcy offers a way out of debt by either eliminating it or repaying part of it. The decision on whether or not to file for bankruptcy is however not an easy one. You may end up losing most of your assets or none at all. At the same time some debts are not covered by bankruptcy. To help you in making the right decision let’s look at how bankruptcy works and when it’s a good idea to file for one.

Which Debts are Discharged by Bankruptcy?

Filing for BankruptcyFiling for BankruptcyBefore filing you have to decide on the type of personal bankruptcy that is unique to you financial situation. The process covers consumer debts such as credit cards, personal loans, mortgages and medical debts. Non consumer debts cannot be forgiven through personal bankruptcy. These include alimony, taxes, child support, and criminal restitutions.

It’s advisable to have a bankruptcy attorney go through your finances to ascertain which debts qualify as consumer debts and which ones do not. For example, a student loan can be either depending on how it was used.

Types of Personal Bankruptcies

In the United States a person can file for either one of the following personal bankruptcies;

Chapter 7 is also known as liquidation bankruptcy. It involves sale of assets that are not protected by bankruptcy and the distributions of the proceeds to creditors. The proceeds can cover your debts in as little as 3 months. Chapter 7 bankruptcy will be ideal if you don’t have a lot of assets that need protection.

Chapter 13 is also referred to as a debt repayment or reorganization. It’s ideal for debtors who have many or valuable assets and don’t want to lose them. Basically the debtor tables a proposal that shows how he/she plans to clear amounts owed within a given time frame. One gets the chance to clear all debts either partially or in full. You can also have others dismissed entirely.

Your attorney does a “means test” to determine which bankruptcy you are eligible for. In a nutshell, you may not be eligible for Chapter 7 if it’s evident that your income can settle debts under Chapter 13. Similarly, a Chapter 13 bankruptcy may be denied if your debts are too high in comparison to your income.

When is Bankruptcy a Good Idea

When is Bankruptcy a Good IdeaWhen is Bankruptcy a Good IdeaBeing eligible for bankruptcy doesn’t necessarily mean that you need to file for one. It could be that all you need is a little professional advice on how to manage your finances.

You also have to contend with the fact that bankruptcy stays on your credit report for seven to ten years. That said, there are some circumstances that call for bankruptcy;

#1 When debt management programs don’t work

Credit counseling is a service offered by most financial advisors and organizations. You may be advised on how to reduce personal expenses in order to free more of your income to clear debts. Other measures include renegotiating terms with credit companies or other creditors.

When debt management fails, whether it’s due to non commitment on your part or refusal by creditors, then bankruptcy could be your only way out.

#2 When you are being sued

A lawsuit filed by creditors can be tricky when you have no means of repaying and remaining liquid. The judgment could lead to sale of assets or foreclosure on your properties. When faced with such eventualities, filing for bankruptcy could be the only way for you to remain afloat. The process offers you the chance to retain some of your property that would otherwise be auctioned.

#3 When faced with overwhelming medical bills

Most financial woes result from making wrong decisions on investments and credit lines. You may however find yourself faced with bills that are not of your own making. Such include medical bills that are not covered by insurance and are beyond your financial reach. In such circumstances, filing for bankruptcy is advisable; the bill will be discharged without over-tasking your income or your family’s finances.

#4 Insolvency Due to Industry Crisis

More often than not you will find yourself contemplating mortgage as an investment. When the industry is in a boom, then you are all set to make a profit on resale in the foreseeable future; that is however not always the case. Upward adjustments on mortgage repayments can leave you deep in debt. Filing for bankruptcy could be the only way of salvaging your property from mortgage lenders.

The take away

Bankruptcy is a federal court-protected financial tool that gives you a “fresh start” from debt burden. The process becomes part of your credit report for 7-10 years. It can also lead to loss of assets hence should be done as a final result. If you are facing foreclosure, hefty medical bills or a creditor’s lawsuit then filing for bankruptcy could be your only way out. The above information gives you an overview on how to go about it.

Related Article: Life After Bankruptcy

Source: creditabsolute.com

What are derogatory marks and how can you fix them? – Lexington Law

Derogatory Marks Header Image

Having a few items on your credit report dragging down your score can be incredibly frustrating, especially if you have a good financial record.

A derogatory mark is a negative item on your credit report that can be fixed by removing it or building positive credit activity. Because derogatory marks can stay on your credit report typically for seven to ten years, it’s important to know how to fix them.

Derogatory marks can affect your credit score, your ability to be approved for credit and the interest rates a lender offers you. Some derogatory marks are due to poor credit activity, such as a late payment. Or it could be an error that shouldn’t be on your report at all.

Types of negative items include late payments (30, 60, and 90 days), charge-offs, collections, foreclosures, repossessions, judgments, liens, and bankruptcies. We’ll cover what each one of these means, and how they can impact your credit reports.

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How do derogatory marks impact my credit score?

The amount that derogatory marks lower your credit score depends on the mark’s severity and how high your credit score was before the mark. For instance, bankruptcy has a greater impact on your credit score than a missed payment or debt settlement. And, unfortunately, having a derogatory mark impacts a high credit score more than it does a low credit score.

According to CreditCards.com and CNNMoney, even a single negative on your credit could cost you over 100 points. Negative items on your credit could cost you thousands of dollars in higher interest rates, or you could be denied altogether.

negative item score decrease stats

How long a derogatory mark stays on your credit report depends on the type of mark.

How long do derogatory marks stay on my credit report?

Derogatory marks usually stay on your credit report for around seven to ten years, depending on the type. After that period passes, the mark will roll off your report and you should start seeing a change in your credit score.

Here’s how long each derogatory mark stays on your credit report:

Type of derogatory mark What is it? How long does this stay on a credit report?
Late payment Late payments are payments made 30 days or more after the payment due date. Typically, this can remain on your report for seven years from the date you made a late payment.
An account in collections or a charge-off Creditors send your account to collections or charge them off if there’s been no payment for 180 days. Typically, this can remain on your report for seven years from the date you made a late payment.
Tax lien A tax lien is when the government claims you’ve neglected or failed to pay taxes on your property or financial assets. Unpaid tax lien: Can remain on your report indefinitely.

Paid tax lien: Can remain on your report seven years from the date the lien was filed.

Civil judgment Civil judgments are a debt you owe through the court, such as if your landlord sued you over missed rent payments. Unpaid civil judgment: Can remain on your report for seven years from when the judgment was filed, but can be renewed if left unpaid.

Paid civil judgment: Can remain on your report for seven years from when the judgment was filed.

Debt settlement Debt settlement is when you and your creditor agree that you will pay less than the full amount owed. A typical time period is seven years, starting from when the debt was settled or the date of the first delinquent payment if there were missed payments.
Foreclosure Foreclosure is when you fail to pay your mortgage and you forfeit the right to the property. Typically, seven years from the foreclosure filing date.
Bankruptcy Bankruptcy is a court proceeding to discharge your debt and sell your assets. Can remain on your report for seven years for Chapter 13 bankruptcy. Chapter 7 bankruptcy can remain on your report for 10 years.
Repossession A repossession is when your assets are seized, such as a vehicle that was used as collateral. Can remain on your report for seven years from the first date of the missed payment.

Types of derogatory marks

Late payments

Late payments occur when you’ve been 30, 60, or 90 days late paying an account. Although you don’t want late payments on your credit reports, an occasional 30 or 60-day late payment isn’t too severe. But you don’t want frequent late payments and you don’t want late payments on every single account. One recent late payment on a single account can lower a score by 15 to 40 points, and missing one payment cycle for all accounts in the same month can cause a score to tank by 150 points or more.

Payments 90 days late or more start to factor more heavily into your credit score, and consecutive late payments are even more harmful to your score, as each subsequent late payment is weighted more heavily. Sometimes, creditors will report payments as late as 120 days, which can be almost as severe as charge-offs and collections. Late payments can be reported to the credit bureaus once you have been more than 30 days late on an account and these late payments can stay on your credit reports for up to seven years.

Charge offs

A charge off is when a creditor writes off your unpaid debt. Typically, this occurs when you have been 180 days late on an account. Charge offs have a severely negative impact on your credit, and like most other negative items can stay on your credit reports for seven years. When an account is charged off, your creditor can sell it to collection agencies, which is even worse news for your credit.

Creditors see a charge off as a glaring indication that you have not been responsible with your finances in the past and cannot be counted on to fulfill your financial obligations in the future. When creditors see a charge off on your credit reports, they are more likely to deny any new applications for loans or lines of credit because they see you as a financial risk. If you do qualify, this can mean higher interest rates. Current creditors can respond by raising your interest rates on your existing balances.

Tax liens

In most cases, liens are the result of unpaid taxes – whether it’s at the state or the federal level. For a federal tax lien, the IRS can place a lien against your property to cover the cost of unpaid taxes. Tax liens can make it difficult to get approved for new lines of credit or loans because the government has claimed to your property. What this means is that if you default on any other accounts, your creditors have to stand in line behind the IRS to collect.

Unpaid liens can stay indefinitely on your credit reports. Once they have been paid, however, they can stay on your reports for up to seven years. Like judgments though, the credit bureaus are strictly regulated on how they can report liens because they are also public records.

Civil judgments

Judgments are public records that are also referred to as civil claims. A judgment can be taken out against a debtor for an unpaid balance. A creditor or collection agency can file a suit in court. If the court rules in favor of the creditor, a judgment is taken out against the debtor and put on their credit reports. This, like many other negative items, has a severely negative impact, and like most other negative items can be reported for seven years.

Judgments are also another indication that a person won’t pay their debts. Lawsuits are time-consuming and costly, so they are something that creditors potentially want to avoid. When a judgment is filed though, it can impact more than credit. The judge may allow the creditor to garnish a debtor’s wages, which can heavily impact finances.

Collections

Collections are the most common types of accounts on credit reports. About one-third of Americans with credit reports have at least one collection account. Over half of these accounts are due to medical bills, but other accounts like unpaid credit cards and loans, utilities, and parking tickets can be sold to collections.

Collections arise from debts that are sold to third parties by the original creditor if a bill goes unpaid for too long. They have a severe negative impact on your credit and can stay on your reports for up to seven years. When potential creditors see collections on your credit reports, it can raise flags and cause them to think that you won’t pay your debts.

Foreclosures

A foreclosure is a legal proceeding that is initiated by a mortgage lender when a homeowner has been unable to make payments. Usually, a lender will file a foreclosure when a homeowner has been three months late or more on mortgage payments.

When a lender decides to foreclose, they begin by filing a Notice of Default with the County Recorder’s Office, which begins the legal proceedings. If a foreclosure goes through and a homeowner can’t catch up on payments, then they are evicted from their home, and the foreclosure is reported to the credit bureaus.

Bankruptcies

Bankruptcy is extremely damaging to credit. Individuals who file for bankruptcy are those who have too much debt, and not enough money to pay it. They likely have had overdue accounts for a long period of time and in some cases loss of income that prevents them from being able to pay any of their bills. Bankruptcies can also arise from huge medical debt.

Whether or not file for bankruptcy is a difficult decision, and doing so can impact your credit from seven to ten years, depending on the type of bankruptcy you file. When a bankruptcy is filed, debts are discharged and the individuals filing are released from most of their previously incurred debts (there are some exceptions). This option can give people a “clean slate” from debt, but creditors don’t like to see it on credit reports because it can imply that an individual won’t pay their debts.

Repossessions

A repossession is a loss of property on a secured loan. Secured loans are where you have collateral, like a car or a house, and the loss occurs when the lender takes back the property because of the inability to pay. Usually, when this occurs, the lender will auction off the collateral to make up for the remaining balance, although it doesn’t usually cover the remaining balance.

When there is a remaining balance, the creditor may choose to sell it off to collections. A repossession has a severe negative impact on credit because it shows a debtor’s inability to pay back a loan. Usually, a repossession follows a long line of late payments and can knock a lot of points off a credit score.

How can I improve my credit score with derogatory marks on my credit report?

If you have derogatory marks, you can improve your credit score by working to rebuild your credit. By boosting your credit score, you’re more likely to get approved for loans and credit cards.

Here’s how to improve your credit score based on the type of derogatory mark:

Derogatory mark What to do to improve your credit score
Late payments Pay off the full debt as soon as possible. If there are late fees, ask the creditor to drop the fee (they often do if it’s your first time being late).
Stay on top of your payments with other lenders to show that you’re responsible, reducing the impact of a late payment.
An account in collections or a charge-off Pay off the debt or negotiate a settlement where you pay less than the full amount owed. Making a payment doesn’t remove the negative mark from your report, but prevents you from being sued over the debt.
Tax lien Pay the taxes you owe in full as soon as possible. Continue to make timely payments with any creditors and lenders.
Civil judgment Pay off the judgment amount, ideally before it gets to court. Make other payments on time to limit the impact of the civil judgment on your credit score.
Debt settlement Pay the full settled amount to prevent your account from going to collections or being charged off.
Foreclosure Keep other credit and loans open and make timely payments to build up positive credit activity.
Bankruptcy Rebuild your credit after bankruptcy with credit cards that cater to lower credit and credit builder loans. Make timely payments to reestablish that you’re a responsible borrower.
Repossessions Continue to pay other bills on time and pay off any further debt to the creditor.

You can also remove derogatory marks if they’re inaccurate or unfairly reported. By requesting your free credit report, you can look for mistakes and inaccuracies.

For example, check to see if a missed payment was inaccurately reported or if someone else’s account got mixed up with yours. You can remove these mistakes, giving your credit score a boost. 

How do I remove derogatory marks from my credit report?

You can remove derogatory marks from your credit report by disputing inaccuracies with the credit bureaus. Here’s how:

1. Request and review your credit report

TransUnion, Equifax and Experian provide one free credit report each year. Request your credit report and review it closely for errors.

Look through both “closed” and “open” derogatory marks. Check to see if your personal information is correct and if the creditor reported payments and dates appropriately. Take note of any discrepancies.

2. Dispute derogatory marks

If you notice incorrect items, payments or dates you need to file a dispute with that credit bureau (and any bureau that lists the item on your report).

You can file a dispute through the credit bureau or have a professional assist you. It’s best to make disputes as soon as you notice them, ideally within 30 days of the incident. The credit bureaus must respond to you within 30-45 days. 

3. Follow up on the dispute

You may have to provide more information or proof to refute something on your credit report. Be sure to respond to any inquiries by the specified time. Check your credit report afterward to make sure that the error is removed.

Removing a derogatory mark from your credit report helps to repair your credit. You’ll also want to improve your credit by doing things like lowering your credit utilization rate, upping the average age of your credit and making timely payments.

If you’re unable to remove a derogatory mark from your credit report, you’ll need to wait until it rolls off of your report, usually within seven to 10 years. In the meantime, work to rebuild your credit and improve your creditworthiness.

steps to remove derogatory marks from credit report

How can I get help with derogatory marks?

You can remove derogatory marks from your credit report by yourself. However, getting help from a credit repair company can make the process easier and improve your chances of getting the negative mark removed.

Many consumers appreciate professional help as it saves time, energy and resources. Contact us for a free credit report consultation. We’ll talk about your unique situation and the ways that we can help you.

Source: lexingtonlaw.com

10 Questions Retirees Often Get Wrong About Taxes in Retirement

You worked hard for your retirement nest egg, so the idea of paying taxes on those savings isn’t exactly appealing. If you know what you’re doing, you can avoid overpaying Uncle Sam as you start collecting Social Security and making withdrawals (including RMDs) from IRAs and 401(k)s. Unfortunately, though, retirees don’t always know all the tax code ins and outs and, as a result, end up paying more in taxes than is necessary. For example, here are 10 questions retirees often get wrong about taxes in retirement. Take a look and see how much you really understand about your own tax situation.

(And check out our State-by-State Guide to Taxes on Retirees to learn more about how you will be taxed by your state during retirement.)

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Tax Rates in Retirement

picture of tax rate arrow chart showing upward trendpicture of tax rate arrow chart showing upward trend

Question: When you retire, is your tax rate going to be higher or lower than it was when you were working?

Answer: It depends. Many people make their retirement plans with the assumption that they’ll fall into a lower tax bracket once they retire. But that’s often not the case, for the following three reasons.

1. Retirees typically no longer have all the tax deductions they once did. Their homes are paid off or close to it, so there’s no mortgage interest deduction. There are also no kids to claim as dependents, or annual tax-deferred 401(k) contributions to reduce income. So, almost all your income will be taxable during retirement.

2. Retirees want to have fun—which costs money. If you’re like many newly retired folks, you might want to travel and engage in the hobbies you didn’t have time for before, and that doesn’t come cheap. So, the income you set aside for yourself in retirement may not be much lower than what you were making in your job.

3. Future tax rates may be higher than they are today. Let’s face it…tax rates now are low when viewed in a historical context. The top tax rate of 37% in 2021 is a bargain compared with the 94% of the 1940s and even the 70% range as recently as the 1970s. And considering today’s political climate and growing national debt, future tax rates could end up much higher than they are today.

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Taxation of Social Security Benefits

picture of a Social Security card surrounded by stacks of coinspicture of a Social Security card surrounded by stacks of coins

Question: Are Social Security benefits taxable?

Answer: Yes. Depending on your “provisional income,” up to 85% of your Social Security benefits are subject to federal income taxes. To determine your provisional income, take your modified adjusted gross income, add half of your Social Security benefits and add all of your tax-exempt interest.

If you’re married and file taxes jointly, here’s what you’ll be looking at:

  • If your provisional income is less than $32,000 ($25,000 for singles), there’s no tax on your Social Security benefits.
  • If your income is between $32,000 and $44,000 ($25,000 to $34,000 for singles), then up to 50% of your Social Security benefits can be taxed.
  • If your income is more than $44,000 ($34,000 for singles), then up to 85% of your Social Security benefits are taxable.

The IRS has a handy calculator that can help you determine whether your benefits are taxable. You should also check out Calculating Taxes on Social Security Benefits.

And don’t forget state taxes. In most states (but not all!), Social Security benefits are tax-free.

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Withdrawals from Roth IRAs

picture of a jar labeled "Roth IRA" with money in itpicture of a jar labeled "Roth IRA" with money in it

Question: Are withdrawals from Roth IRAs tax-free once you retire?

Answer: Yes. Roth IRAs come with a big long-term tax advantage: Unlike their 401(k) and traditional IRA cousins—which are funded with pretax dollars—you pay the taxes on your contributions to Roths up front, so your withdrawals are tax-free once you retire. One important caveat is that you must have held your account for at least five years before you can take tax-free withdrawals. And while you can withdraw the amount you contributed at any time tax-free, you must be at least age 59½ to be able to withdraw the gains without facing a 10% early-withdrawal penalty.

4 of 10

Taxation of Annuity Income

picture of an elderly couple discussing finances with an advisorpicture of an elderly couple discussing finances with an advisor

Question: Is the income you receive from an annuity you own taxable?

Answer: Probably (at least for some of it). If you purchased an annuity that provides income in retirement, the portion of the payment that represents your principal is tax-free; the rest is taxable. The insurance company that sold you the annuity is required to tell you what is taxable. Different rules apply if you bought the annuity with pretax funds (such as from a traditional IRA). In that case, 100% of your payment will be taxed as ordinary income. In addition, be aware that you’ll have to pay any taxes that you owe on the annuity at your ordinary income-tax rate, not the preferable capital gains rate.

5 of 10

Age for Starting RMDs

picture of elderly man blowing out candles on a birthday cakepicture of elderly man blowing out candles on a birthday cake

Question: At what age must holders of traditional IRAs and 401(k)s start taking required minimum distributions (RMDs)?

Answer: Age 72. The SECURE Act raised the age for RMDs to 72, starting on January 1, 2020. It used to be 70½. (Note that, although the CARES Act waived RMDs for 2020, they’re back for 2021 and beyond.)

As for the amount that you are forced to withdraw: You’ll start out at about 3.65%, and that percentage goes up every year. At age 80, it’s 5.35%. At 90, it’s 8.77%. Figuring out the percentages might not be as hard as you think if you try our RMD calculator. (Note that, beginning in 2022, RMD calculations will be adjusted so that distributions are spread out over a longer period of time.)

6 of 10

RMDs From Multiple IRAs and 401(k)s

picture of a spiral notebook with "Required Minimum Distributions" written on the front coverpicture of a spiral notebook with "Required Minimum Distributions" written on the front cover

Question: Are RMDs calculated the same way for distributions from multiple IRAs and multiple 401(k) plans?

Answer: No. There’s one important difference if you have multiple retirement accounts. If you have several traditional IRAs, the RMDs are calculated separately for each IRA but can be withdrawn from any of your accounts. On the other hand, if you have multiple 401(k) accounts, the amount must be calculated for each 401(k) and withdrawn separately from each account. For this reason, some 401(k) administrators calculate your required distribution and send it to you automatically if you haven’t withdrawn the money by a certain date, but IRA administrators may not automatically distribute the money from your IRAs.

7 of 10

Due Date for Your First RMD

picture of a piggy bank with "RMD" written on the sidepicture of a piggy bank with "RMD" written on the side

Question: Do you have to take your first RMD by December 31 of the year you turn 72?

Answer: No. Normally, you have to take RMDs for each year after you turn age 72 by the end of the year. However, you don’t have to take your first RMD until April 1 of the year after you turn 72. But be careful—if you delay the first withdrawal, you’ll also have to take your second RMD by December 31 of the same year. Because you’ll have to pay taxes on both RMDs (minus any portion from nondeductible contributions), taking two RMDs in one year could bump you into a higher tax bracket.

It could also have other ripple effects, such as making you subject to the Medicare high-income surcharge if your adjusted gross income (plus tax-exempt interest income) rises above $88,000 if you’re single or $176,000 if married filing jointly. (Note: Those are the income thresholds for determining 2021 surcharges.)

8 of 10

Taxation of Life Insurance Proceeds

picture of a life insurance contract with money laying on itpicture of a life insurance contract with money laying on it

Question: If your spouse dies and you get a big life insurance payout, will you have to pay tax on the money?

Answer: No. You have enough to deal with during such a difficult time, so it’s good to know that life insurance proceeds paid because of the insured person’s death are not taxable.

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Estate Tax Threshold

picture of the words "Estate Tax" next to a judge's gavel and moneypicture of the words "Estate Tax" next to a judge's gavel and money

Question: How valuable must an individual’s estate be at death to be hit by federal estate taxes in 2021?

Answer: $11.7 million ($23.4 million or more for a married couple). If the value of an estate is less than the threshold amount, then no federal estate tax is due. As a result, federal estate taxes aren’t a factor for very many people. However, that will change in the future. The 2017 tax reform law more than doubled the federal estate tax exemption threshold—but only temporarily. It’s schedule to drop back down to $5 million (plus adjustments for inflation) in 2026. Plus, during his 2020 campaign, President Biden called for a reduction of the exemption threshold sooner.

If your estate isn’t subject to federal taxes, it still might owe state taxes. Twelve states and the District of Columbia charge a state estate tax, and their exclusion limits can be much lower than the federal limit. In addition, six states impose inheritance taxes, which are paid by your heirs. (See 18 States With Scary Death Taxes for more details.)

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Standard Deduction Amounts

picture of a 1040 tax form with a pen laying on it next to the standard deduction linepicture of a 1040 tax form with a pen laying on it next to the standard deduction line

Question: If you’re over 65, can you take a higher standard deduction than other folks are allowed?

Answer: Yes. For 2021, to the standard deduction for most people is $12,550 if you’re single and $25,100 for married couples filing a joint tax return ($12,400 and $24,800, respectively, for 2020). However, those 65 and older get an extra $1,700 in 2021 if they’re filing as single or head of household ($1,650 for 2020). Married filing jointly? If one spouse is 65 or older and the other isn’t, the standard deduction increases by $1,350 ($1,300 for 2020). If both spouses are 65 or older, the increase for 2021 is $2,700 ($2,600 for 2020).

Source: kiplinger.com

4 Credit Cards That Can Help You Save for a Car

According to Kelley Blue Book, the average price for a light vehicle in the United States was almost $38,000 in March 2020. Of course, the sticker price will depend on whether you want a small economy car, a luxury midsize sedan, an SUV or something in between. But the total you pay for a vehicle also depends on a number of other factors if you’re taking out a car loan.

Get the 4-1-1 on financing a car so you can make the best decision for your next vehicle purchase.

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Decide Whether to Finance a Car

Whether or not you should finance your next vehicle purchase is a personal decision. Most people finance because they don’t have an extra $20,000 to $50,000 they want to part with. But if you have the cash, paying for the car outright is the most economical way to purchase it.

For most people, deciding whether to finance a car comes down to a few considerations:

  • Do you need the vehicle enough to warrant making a monthly payment on it for several years?
  • Does the monthly payment work within your personal budget?
  • Is the deal, including the interest rate, appropriate?

Factors to Consider When Financing a Car

Obviously, the first thing to consider is whether you can afford the vehicle. But to understand that, you need to consider a few factors.

  • Total purchase price. Total purchase price is the biggest impact on how much you’ll pay for the car. It includes the price of the car plus any add-ons that you’re financing. Depending on the state and your own preferences, that might include extra options on the vehicle, taxes and other fees and warranty coverage.
  • Interest rate, or APR. The interest rate is typically the second biggest factor in how much you’ll pay overall for a car you finance. APR sounds complex, but the most important thing is that the higher it is, the more you pay over time. Consider a $30,000 car loan for five years with an interest rate of 6%—you pay a total of $34,799 for the vehicle. That same loan with a rate of 9% means you pay $37,365 for the car.
  • The terms. A loan term refers to the length of time you have to pay off the loan. The longer you extend terms, the less your monthly payment is. But the faster you pay off the loan, the less interest you pay overall. Edmunds notes that the current average for car loans is 72 months, or six years, but it recommends no more than five years for those who can make the payments work.

It’s important to consider the practical side of your vehicle purchase. If you take out a car loan for eight years, is your car going to still be in good working order by the time you get to the last few years? If you’re not careful, you could be making a large monthly payment while you’re also paying for car repairs on an older car.

Buying a Car with No Credit

You can buy a car anytime if you have the cash for the purchase. If you have no credit or bad credit, your options for financing a car might be limited. But that doesn’t mean it’s impossible to get a car loan without credit.

Many banks and lenders are willing to work with people with limited credit histories. Your interest rate will likely be higher than someone with excellent credit can command, though. And you might be limited on how much you can borrow, so you probably shouldn’t start looking at luxury SUVs. One tip for increasing your chances is to put as much cash down as you can when you buy the car.

If you can’t get a car loan on your own, you might consider a cosigner. There are pros and cons to asking someone else to sign on your loan, but it can get you into the credit game when the door is otherwise barred.

Personal Loans v. Car Loans: Which One Is Better?

Many people wonder if they should use a personal loan to buy a car or if there is really any difference between these types of financing. While technically a car loan is a loan you take out personally, it’s not the same thing as a personal loan.

Personal loans are usually unsecured loans offered over relatively short-term periods. The funds you get from a personal loan can typically be used for a variety of purposes and, in some cases, that might include buying a car. There are some great reasons to use a personal loan to buy a car:

  • If you’re buying a car from a private seller, a personal loan can hasten the process.
  • Traditional auto loans typically require full coverage insurance for the vehicle. A personal loan and liability insurance may be less expensive.
  • Lenders typically aren’t interested in financing cars that aren’t in driving shape, so if you’re buying a project car to work on in your garage during your downtime, a personal loan may be the better option.

But personal loans aren’t necessarily tied to the car like an auto loan is. That means the lender doesn’t necessarily have the ability to repossess the car if you stop paying the loan. Since that increases the risk for the lender, they may charge a higher interest rate on the loan than you’d find with a traditional auto loan. Personal loans typically have shorter terms and lower limits than auto loans as well, potentially making it more difficult for you to afford a car using a personal loan.

Steps You Should Follow When Financing a Car

Before you jump in and apply for that car loan, review these six steps you should take first.

1. Check your credit to understand whether you are likely to be approved for a loan. Your credit also plays a huge role in your interest rate. If your credit is too low and your interest rate would be prohibitively high, it might be better to wait until you can build or repair your credit before you get an auto loan. Sign up for ExtraCredit to see 28 of your FICO scores from all three credit bureaus.

2. Research auto loan options to find the ones that are right for you. Avoid applying too many times, as these hard inquiries can drag your credit score down with hard inquiries. The average auto loan interest rate is 27% on 60-month loans (as of April 13, 2020).

3. Get your trade-in appraised. The dealership might give you money toward your trade-in. That reduces the price of the car you purchase, which reduces how much you need to borrow. A few thousand dollars can mean a more affordable loan or even the difference between being approved or not.

4. Get prequalified for a loan online. While most dealers will help you apply for a loan, you’re in a better buying position if you walk into the dealership with funding ready to go. Plus, if you’re prequalified, you have a good idea what you can get approved for, so there are fewer surprises.

5. Buy from a trusted dealer. Unfortunately, there are dealerships and other sellers that prey on people who need a car badly. They may charge high interest or sell you a car that’s not worth the money you pay. No matter your financial situation, always try to work with a dealership that you can trust.

6. Talk to your car insurance company. Different cars will carry different car insurance premiums. Make a call to your insurance company prior to the sale to discuss potential rate changes so you’re not surprised by a higher premium after the fact.

Next to buying a home, buying a car is one of the biggest financial decisions you’ll make in your life, and you’ll likely do it more than once. Make sure you understand the ins and outs of financing a car before you start the process.

Source: credit.com

2021 Tax Brackets Are Here: Here’s What You’ll Owe Next Year

The year 2021 is looking a lot like 2020, at least in terms of taxes.

The IRS released its inflation adjustments for 2021 federal income tax rates and brackets. While these changes are unlikely to have a huge impact on your bottom line, there are a few things you should be aware of.

Because these are the 2021 tax rates, they’ll determine your tax bill that will be due in 2022. You’ll use 2020 rates and brackets when you file your taxes on or before May 17, 2021. That’s 32 days later than usual due to the tax deadline extension.

How the 2021 Tax Brackets Break Down

There are seven tax brackets that range from 10% to 37%. The 2020 and 2021 tax brackets break down as follows:

Unmarried Individuals

Tax Bracket Taxable Income for 2020 (use when you file in 2021) Taxable income for 2021 (use when you file in 2022)
10% Up to $9,875 Up to $9,950
12% $9,875 to $40,125n $9,950 to $40,525
22% $40,125 to $85,525 $40,525 to $86,375
24% $85,525 to $163,300 $86,375 to $164,925
32% $163,300 to $207,350 $164,925 to $209,425
35% $207,350 to $518,400 $209,425 to $523,600
37% Over $518,400 Over $523,600

Married Individuals Filing Jointly or Surviving Spouses

Tax Bracket Taxable income for 2020 (use when you file in 2021) Taxable income for 2021 (use when you file in 2022)
10% Up to $19,750 Up to $19,900
12% $19,750 to $80,250n $19,900 to $81,050
22% $80,250 to $171,050 $81,050 to $172,750
24% $171,050 to $326,600 $172,750 to $329,850
32% $326,600 to $414,700n $329,850 to $418,850
35% $414,700 to $622,050n $418,850 to $628,300
37% Over $622,050 Over $628,300

Heads of Household

Tax Bracket Taxable income for 2020 (use when you file in 2021) Taxable income for 2021 (use when you file in 2022)
10% Up to $14,100 Up to $14,200
12% $14,100 to $53,700n $14,200 to $54,200
22% $53,700 to $85,500 $54,200 to $86,350
24% $85,500 to $163,300 $86,350 to $164,900
32% $163,300 to $207,350 $164,900 to $209,400
35% $207,350 to $518,400 $209,400 to $523,600
37% Over $518,400 Over $523,600
Pro Tip

Not sure of your filing status? This interactive IRS quiz can help you determine the correct status. If you qualify for more than one, it tells you which one will result in the lowest tax bill.

Tax rates apply to the income within each bracket. So if you’re an unmarried individual with taxable income of $50,000, you won’t pay 22% of that $50,000 to Uncle Sam.

According to the 2021 tax brackets (the ones you’ll use for next year’s return), you’d pay:

  • 10% on the first $9,950
  • 12% on the next $30,575 ($40,525 – $9,950 = $30,575)
  • 22% on the next $9,475 ($50,000 – $40,525 = $9,475)

2 Tax Changes That Could Affect You in 2021

The modified tax brackets aren’t the only changes for 2021. About 60 tax provisions were adjusted in the new year. A few highlights:

  • The standard deduction will rise slightly: For 2020, the standard deduction is $12,400 for single filers and people who are married filing separately. In 2021, it will rise by $150 to $12,550 for single taxpayers. For those who are married filing jointly, the standard deduction will rise by $300, from $24,800 in 2020 to $25,100 in 2021.
  • Some limited-income families can get an extra $68. The maximum Earned Income Tax Credit will increase in 2021 to $6,728, from $6,660 in 2020. You need at least three children to qualify for the maximum amount.

3 Tax Rules That Aren’t Changing in 2021

  • IRA contribution limits won’t change. The traditional IRA and Roth IRA contribution limits will remain at $6,000 for people under 50. The extra $1,000 “catch-up” contribution the IRS allows people 50 and older to make won’t change either. You can still fund your IRA for 2020 until tax day, which is May 17, 2021.
  • 401(k) contribution limits aren’t changing either: If you have an employer-sponsored tax-deferred retirement plan, like a 401(k) or 403(b), your maximum contribution is still $19,500 in 2021. The additional “catch-up” contribution workers ages 50 and older can make will also remain at $6,500.
  • There’s no limit on itemized deductions. The Tax Cuts and Jobs Act of 2017 suspended these limits.

Ready to Start Your 2021 Tax Prep?

If you’re ready to dive into your taxes, you can check out this comprehensive summary of 2021 tax changes courtesy of the IRS.

Even if you’re not ready to jump into 2021 tax planning mode just yet, keep in mind it’s a good time to check your tax withholdings and make adjustments if necessary. Just make sure you file your return or ask for an extension by the May 17 deadline. If you can’t afford your tax bill for 2020, it’s essential that you file a tax return anyway and ask for an IRS payment plan.

Robin Hartill is a certified financial planner and a senior editor at The Penny Hoarder. She writes the Dear Penny personal finance advice column. Send your tricky money questions to [email protected]

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Source: thepennyhoarder.com