When it comes to supporting a charity, it doesn’t get much more convenient than donating at the card reader in the checkout line. But depending on your motivations and financial situation, it may not be the best approach.
More than two-thirds (68%) of Americans donate to charity at the register of retail establishments, according to a new NerdWallet survey conducted online by The Harris Poll Oct. 10-12. Some give because the cause is important to them, and others give because they feel guilty if they don’t. But whatever the reason, being thoughtful about your donations can ensure you’re giving without breaking the bank.
For customers, these donations likely look like an additional $5 or so on their total, or “rounding up” to the next dollar amount. In either case, the incremental giving adds up to hundreds of millions of dollars each year nationwide.
Many shoppers likely make the decision to donate in the moment. But thinking through why you donate ahead of time can help you make more informed decisions that align with your values and your financial goals.
Here’s how to decide whether you should give to charity on your next shopping trip.
Skip: If you want to have a significant impact and can give more
Small donations at the cash register may add up over time, but making a large donation could be more impactful for the recipient.
About one-third (32%) of Americans donate to charity at retail registers because the cause is important to them, according to the recent NerdWallet survey, and 26% because they like to be charitable. Donating at the register often means sprinkling a few dollars across numerous recipients as you go from store to store. If you want to have a bigger impact on one important cause, a larger donation can be a better fit.
Give: If a small donation suits you best
Donating $5 every few weeks on your grocery run may be easier on some budgets.
One-fourth of Americans (25%) say they give at the register because small donations don’t feel as costly, and one-third (33%) of Americans who donate at the register say they wouldn’t donate to charity at all if they didn’t donate at the cash register, according to the survey. If you already have your card out, small donations are convenient.
These campaigns work for that reason. Albertsons Companies Foundation, the charitable arm of the grocery store chain, raised $43.5 million for hunger relief at cash registers in 2022, according to Engage for Good, a marketing company that helps businesses and nonprofits raise money. That’s in addition to millions raised by the chain for Ukraine aid and other causes.
Skip: If you’re hoping for an easy tax break
Donating to charity can reduce your taxable income, but giving incrementally at the cash register can make claiming this deduction more difficult.
In order to claim a deduction for donations, they must be for a tax-exempt charity that is recognized by the IRS. Further, you must itemize deductions on your income tax return rather than taking the standard deduction. You’ll want to track these donations with documentation such as your credit card or bank statements. All of this is a lot to ask for a small donation at the register. If you want to deduct donations, direct contributions will be less of an administrative hassle.
Give: If it makes you feel good
Giving feels good, and feeling good can promote more giving. It’s a sort of generosity cycle.
A significant body of research supports that giving activates the brain’s reward system, which can lead to greater happiness. And the amount of happiness that comes from generosity isn’t dependent on the amount you give, according to a 2017 study in Nature Communications. In this way, giving small amounts not only adds up for the organizations, but also for the donors.
Skip: If it’s not in the budget
If your current financial situation has you cutting costs to make ends meet, don’t make it harder on yourself.
As we established, giving should make you feel good. But 13% of Americans say they donate to charity at the register because they feel guilty if they don’t, 10% say it’s easier than saying no, and 8% do it because they’re embarrassed to say no, according to the survey. A dollar here or there doesn’t seem like much when things are going well, but every dollar counts when you’re dealing with unexpected expenses, a job loss or other financial strain.
If donating to charity adds financial stress to your current situation, skip it. This isn’t the last time you’ll be asked.
METHODOLOGY
This survey was conducted online within the United States by The Harris Poll on behalf of NerdWallet from Oct. 10-12, 2023, among 2,096 U.S. adults ages 18 and older. The sampling precision of Harris online polls is measured by using a Bayesian credible interval. For this study, the sample data is accurate to within +/- 2.7 percentage points using a 95% confidence level. For complete survey methodology, including weighting variables and subgroup sample sizes, please contact [email protected].
NerdWallet defines generations in the following way: Generation Z, ages 18-26; millennials, ages 27-42; Generation X, ages 43-58; and baby boomers, ages 59-77.
Disclaimer
NerdWallet disclaims, expressly and impliedly, all warranties of any kind, including those of merchantability and fitness for a particular purpose or whether the article’s information is accurate, reliable or free of errors. Use or reliance on this information is at your own risk, and its completeness and accuracy are not guaranteed. The contents in this article should not be relied upon or associated with the future performance of NerdWallet or any of its affiliates or subsidiaries. Statements that are not historical facts are forward-looking statements that involve risks and uncertainties as indicated by words such as “believes,” “expects,” “estimates,” “may,” “will,” “should” or “anticipates” or similar expressions. These forward-looking statements may materially differ from NerdWallet’s presentation of information to analysts and its actual operational and financial results.
New York — and New York City in particular — is known for having some of the highest taxes in the United States. NYC residents pay income taxes and sales taxes to both the state and the city, which can make it a bit confusing to figure out how much tax you’re paying to which entity.
What is New York City’s sales tax?
The total sales tax rate in New York City is 8.875%. That consists of a 4.5% sales and use tax from the city, a 4% sales and use tax from the state, and a 0.375% Metropolitan Commuter Transportation District (MCTD) surcharge.
Sales taxes apply to retail sales of most goods and services, with a few exceptions, while use tax applies to business purchases from out-of-state vendors that don’t collect state and local sales taxes. (If you buy a printer for your business from a website that doesn’t collect sales taxes, for example, it’s probably subject to city and state use tax.)
State sales taxes apply to any sales made in New York state, city sales taxes apply to any sales made in New York City and MCTD surcharges apply to any sales made in the city, as well as Rockland, Nassau, Suffolk, Orange, Putnam, Dutchess and Westchester counties.
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What is exempt from NYC sales tax?
There are a few exemptions from city and state sales and use taxes, generally involving essential day-to-day goods. The following items are exempt from city, state and MCTD sales taxes:
Clothing and footwear costing less than $110.
Unprepared and packaged food.
Certain items used in clothing manufacturing and repair.
In addition, there are a few other items that are exempt from New York state sales taxes but may still be subject to city and MCTD taxes:
Beautician, barbering and hair-restoring services.
Hair removal services.
Manicures and pedicures.
Massage services.
Tanning salons.
Tattooing or permanent makeup.
Weight control and health salons, gyms, Turkish and sauna baths, and similar places.
Who pays NYC sales tax?
If you’re a consumer, NYC sales tax is generally baked into the price of whatever you’re buying — and isn’t something you need to worry about, unless you want to try to deduct it from your income tax liability (more on that in a moment).
Businesses are responsible for actually paying NYC and New York state sales, use and MCTD taxes to the government by filing sales tax returns.
How do you file NYC sales tax returns?
NYC sales and use taxes — as well as the MCTD surcharge — are collected by New York state.
Businesses can file New York sales tax returns on the state’s Sales Tax Web File site
. Some businesses, such as those with taxable receipts of more than $500,000, must use the state’s PrompTax program, which a business can join through an Online Services for businesses account.
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Can you deduct NYC sales tax?
You can deduct NYC sales tax via the state and local tax (SALT) deduction — but doing so comes with some big caveats. The SALT deduction is only available to taxpayers who choose itemized deductions, is capped at $10,000 for joint filers, and makes you choose between deducting your state and local income taxes or your state and local sales taxes.
Itemizing isn’t right for every taxpayer. It’s a good idea to consult a trusted tax professional, such as a certified public accountant (CPA), to see if it’s right for you.
Inside: Do you want to claim your partner as a dependent on your taxes? This guide will explain the rules of claiming dependents whether girlfriend or boyfriend and help you take the necessary steps to do so.
Navigating the waters of tax credits can be tricky, especially when it involves claiming an unmarried partner as a dependent.
The Internal Revenue Service (IRS) does permit the declaration of a non-relative adult as a dependent, provided certain conditions are met.
And that is where it gets tricky for the tax novice.
That is where we are going to reference the IRS guidance, so you can determine whether or not you qualify for this deduction.
By pointing you in the right direction, you can understand the specific tests and requirements to avoid any tax-related complications.
This post may contain affiliate links, which helps us to continue providing relevant content and we receive a small commission at no cost to you. As an Amazon Associate, I earn from qualifying purchases. Please read the full disclosure here.
Understanding dependency in the context of taxes
The word “dependent” might remind you of a newborn baby or an elderly family member. But in tax terms, the meaning broadens.
In the IRS terms, a “dependent is a person, other than the taxpayer or spouse, who entitles the taxpayer to claim a dependency exemption.” 1
This might be a child, an adult family member, a significant other, or even a close friend. This term “qualifying relative” is crucial in IRS parlance for its implications on your tax dues.
Typically, any person can qualify as a dependent if more than half of their financial support, including living and medical expenses, is taken care of. Also, it’s an opportunity to boost one’s tax return by up to $500 with the Other Dependent Tax Credit.
What qualifies a person as a dependent?
The IRS bases dependents on two categories: “Qualifying children” and “Qualifying relatives.”2 You might think of a qualifying child as your son or daughter. Expanding the scope, a qualifying relative can be a sibling, a parent, or even a significant other.
The essence lies in their financial reliance on you and the nature of your relationship. They ought to:
Be related to you via blood, marriage, or adoption;
You provide over 50% of their financial support including housing, food, medical care, and other expenses
They are U.S. citizen.
The income of the possible dependent.
These nuanced rules might sound overwhelming, but IRS guidance and tax experts like TurboTax can help lighten the load.
Now, let’s address this sticking point: Can you actually claim your partner as a dependent? The following section unravels the mystique.
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Can I Claim My Partner as a Dependent?
You can claim your partner as a dependent on your tax return, provided they meet certain criteria explained by the IRS, including passing the non-qualifying child test, the citizen or resident test, the joint return test, the income test, and the dependent taxpayer test.
I know this is where it gets difficult to follow for the average person.
So, we are here, to break this terminology down into layman’s terms, as such you can then make the best decision for your tax situation.
If you are still confused, then consult with an online tax software like TurboTax or a tax professional for guidance on your personal taxes.
Basic requirements for claiming your partner as a dependent
This essentially means that your partner should be financially dependent on you, where you bear more than half of their living expenses.
In essence, claiming your partner as a dependent revolves around these fundamentals: 2
Residency: Your partner must have been living with you for the full tax year.
Income limit: Your partner’s gross income should not exceed $4,700 for the year 2023.
Support Requirement: You are the main pillar for your partner’s financial needs by covering over half of their total expenses.
Anyone Else Claiming Them: None else should claim your partner as their dependent.
Unmarried. Your partner must be unmarried legally.
All fulfillment of these criteria moves you a step closer to enjoying some tax relief.
Confirm with an accountant or tax expert as exceptions can exist, such as temporary absences due to illness, education, business, and others.
Common scenarios where you can claim your partner as a dependent
Claiming a partner as a dependent isn’t as fancy as it sounds, but it’s plausible. Here are common scenarios enabling you to do so:
Co-habiting Before Marriage: You and your partner share a home, and you pay more than half of your partner’s living costs. However, your living situation cannot violate local laws, as in some states, “cohabitation” by unmarried people is against the law.
Unemployed Partner: Your partner’s tie with working life is severed (e.g., due to health issues or being laid off), and you bear most of the living expenses.
Supporting Student Partner: Your partner pursues their education, and you shoulder the majority of their expenses.
Take this interactive IRS quiz to determine whom I may claim as a dependent.
How much will I get if I claim my girlfriend as a dependent?
Now the pivotal question: what’s the advantage in dollars and cents?
In essence, claiming your partner as a dependent will slash your taxable income by $500 with the Other Dependent Tax Credit. 3
If you already qualify for Head of Household status with another dependent, then it is possible your deduction may be more. 4
Remember, there’s no one-size-fits-all answer. When tax complexities strike, consult an expert!
Is it better to claim my girlfriend as a dependent?
Honestly, like most tax questions, the answer is: it depends.
If you’re covering your partner’s majority expenses and they’re fulfilling all IRS criteria, then claiming them can bring solid tax savings.
Yet, bear in mind:
If your partner earns substantial income (greater than $4,700), they might lose personal benefits by becoming your dependent.
By claiming your partner, their Social Security or medical benefits may take a hit.
So, assess your partner’s income, benefit entitlements, and your tax situation. Then, tread wisely.
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Important Rules to Keep in Mind When Claiming Your Partner
When filing taxes, it’s crucial to understand that both parties are responsible for the accuracy of each other’s tax reporting and liability.
It’s worth noting that tax advantages and disadvantages exist in the scenario of being married and filing jointly, such as potential reductions in your tax bracket and sharing of business losses. So, it may be something to consider.
Can I claim my girlfriend as a dependent if she has no income?
In a nutshell, yes! If your girlfriend had no income in the tax year, you might claim her as a dependent. Given you provide over half of her total support and she lived with you all year, you’re golden.
For 2023, your partner’s gross income should not exceed $4,700.
However, keep in mind that in cases where public assistance or Social Security benefits are her primary financial sources, claiming her could negatively impact those benefits.
Learn the answer to do you have to file taxes if you have no income.
Remember: tax waters are often murky. When in doubt, lean on a tax professional’s shoulder!
Support factors
Answering the support question plays a hefty role in determining who qualifies as a dependent.
You shouldn’t just share the living cost; you should pay more than half of it. Remember, it includes an array of expenses, like food, clothing, education, or medical expenses.
The implication of your partner being claimed by someone else
Here’s a key rule: if someone else is claiming your partner as a dependent, you’re out of the game. The IRS rules say a person can be claimed as a dependent by only one taxpayer in a single tax year.
This could happen if your partner perhaps lives part of the year with someone else like a parent.
Another possibility is if your partner is legally married still, then they would have to file a married, filing separately return.
So, if your partner qualifies as someone else’s dependent, even if they don’t claim them, you can’t claim your partner.
Frequent Situations Where You Can’t Claim Your Partner as a Dependent
Considerations for Non-resident or Non-citizen partners
If your partner isn’t a U.S. citizen, resident, or national, the dependent claiming game changes. Notably, nonresident aliens cannot be claimed as dependents.
However, if your partner is a resident of Canada or Mexico or a U.S. national, you may claim them. But they should be living with you full-time. 2
This rule extends to partners awaiting changes in their residency or citizenship status. In such cases, you must wait until their status changes before claiming them.
When your partner earns more than the stipulated income threshold
When your partner’s income level sails past the IRS limit ($4,700 in 2023), claiming them as a dependent slips off the table. 2
Any part-time job, seasonal work, or income source counts, even those seemingly negligible. As soon as they cross this threshold, regardless of how heavily they rely on you or where they reside, they can’t qualify as your dependent.
Make sure to stay updated on IRS rules. They adjust the income limit for inflation annually, which changes this income ceiling. Keep an eye peeled for those IRS updates!
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How to Officially Claim Your Partner on Your Taxes
To officially claim your partner as a dependent on your tax return, you will do this when you file your taxes.
Thankfully, this is made easier with online software companies like TurboTax or H&R Block.
The same is true when you are trying to figure out how to file taxes without a W2.
Necessary steps to claim your partner on your taxes
You will first identify them as “other qualifying dependent” or “other qualifying relative”.
Gather the facts first: Confirm your partner’s income, residency, and who has been supporting them for more than half the year.
Document expenses: Keep track of all relevant bills and receipts to demonstrate your majority support.
Use tax software or a professional: Follow prompts about dependents in tax software like TurboTax. They could guide you through the process and specifics.
Complete relevant Tax Forms: Prepare the necessary forms such as Form 1040 and Schedule H and have proof of residency, financial support, gross income information, and certification of your domestic partnership to support your claim.
File your return: Don’t forget to include your partner’s details and tick the correct boxes.
Remember, the devil is in the details. So carefully evaluate your situation to avoid missteps, and consult with a tax professional when in doubt.
Pitfalls to avoid while filing tax returns
While preparing to file your tax returns, beware of these common pitfalls:
Incorrect income calculation: Ensure you tally your partner’s gross income accurately. Reminder: it should not eclipse $4,700 in 2023.
Overlooked Living Qualification: Your partner must have resided with you the entire year. Temporary absences (illness, education) can be exceptions.
Ignoring Other Claimants: If someone else is poised to claim your partner as a dependent – even if they don’t – you can’t claim them.
Emergency Funds Consideration: If your partner taps into their savings for a large expense, this could speak against you providing most of their support.
Forgotten Documents: Maintain a record of bills, receipts, and other expense documents.
The IRS overlooks no mistakes, so take care and stay informed. When in doubt, professional tax help is a button away.
Frequently Asked Questions (FAQ)
Intriguing question! Here’s the short answer: Your partner’s marital status may indeed affect your ability to claim them as a dependent.
For instance, if your partner is married and files a joint tax return with their spouse, you can’t claim them as a dependent.
Remember, tax rules are lock-key specific, and bending them can lead to penalties. Always seek advice from a tax professional.
While you might be able to claim your partner as a dependent, laying claim on their children as dependents is unlikely. IRS rules are clear: you can claim a dependent only if they’re your child or relative.
Since your partner’s children don’t fulfill this requirement, you can’t claim them unless they can be considered your qualifying relative AND you provide more than half of their support.
As always, it’s best to run this by a tax professional for clarity on your unique situation. All we tax-seers can do is guide; the decision falls on your shoulders.
Here’s the hard truth: if your partner didn’t live with you all year, you couldn’t claim them as a dependent. IRS rules are stringent about this: your partner must have the same home as you for the entire year. That is 365 days, no less.
However, IRS grants a green light to temporary separations due to special circumstances like illness, education, military service, or even a holiday. The key lies in their intent to return and, of course, their follow-through.
Stay wise and stay informed, and consult with a tax analyst to seal your decision with assurance.
Get Online Help
Navigating tax rules and regulations doesn’t need to be overwhelming. With the advent of online help, understanding whether you can claim your partner as a dependent becomes considerably more manageable. Here are a few benefits of seeking online help:
Convenience: With online help, you can access the information you need anywhere, anytime. No need to schedule appointments or deal with traffic to get to a tax office. You can get the updates and instructions right from the comfort of your own home.
Accessibility: Some great examples of accessible platforms are TurboTax, e-File, and H&R Block which provide 24/7 support and resources. They offer a wealth of information and experts at your fingertips.
Expertise: Apart from the convenience, these websites employ tax experts who deliver professional analysis and guidance tailored to your specific needs. Specifically, you can use TurboTax Live Full Service for someone to do your taxes from start to finish. Or you can ask questions with TurboTax Live Assisted.
File your own taxes with confidence using TurboTax. This can greatly simplify the process and minimize potential missteps.
Now, Can I Claim my Unmarried Partner as a Dependent is Up to You
As they say, “Ignorance of the law is no excuse”. The same holds true for tax rules.
Falsely claiming a dependent can lead to severe penalties, not just a dinging of your wallet. You’d be sailing the choppy waters of tax evasion, which can bring on hefty fines or even dark days behind bars.
In blatant cases, the IRS could impose a Civil Fraud Penalty. That means a penalty amounting to 75% of the unpaid tax amount resulting from fraud. 5
In short, play by the rules! Accurate and clear tax filing may seem tedious, yet it will steer clear of any legal trouble. Remember, it’s always safer to ask if you are unsure!
Now, are you wondering why do I owe taxes this year?
Source
Internal Revenue Service. “Tax Tutorial.” https://apps.irs.gov/app/understandingTaxes/hows/tax_tutorials/mod04/tt_mod04_glossary.jsp?backPage=tt_mod04_01.jsp#dependent. Accessed October 23, 2023.
Internal Revenue Service. “About Publication 501, Dependents, Standard Deduction, and Filing Information.” https://www.irs.gov/forms-pubs/about-publication-501. Accessed October 23, 2023.
Internal Revenue Service. “About Publication 501, Dependents, Standard DeductionUnderstanding the Credit for Other Dependents.” https://www.irs.gov/newsroom/understanding-the-credit-for-other-dependents. Accessed October 23, 2023.
Intuit TurboTax. “Guide to Filing Taxes as Head of Household.” https://turbotax.intuit.com/tax-tips/family/guide-to-filing-taxes-as-head-of-household/L4Nx6DYu9. Accessed October 23, 2023.
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Do you think it’s possible someone stole your tax refund check? You wouldn’t be alone. In 2020, just under 1.4 million people reported cases of identity theft, and around 400,000 of those involved the theft of government benefits or documents—including tax refunds. The issue was concerning enough that the IRS started what it calls Identity Theft Central to provide information about identity theft.
Find out how identity theft happens below. Then learn what action you should take if you believe your tax refund was stolen.
How Does Identity Theft Happen?
Identity theft occurs when someone gathers enough information about you that they can impersonate you to a sufficient degree to commit fraud. For example, if someone gets enough of your sensitive personal information, they can apply for credit cards in your name. They receive the cards after approval, run up balances and never pay them because the account is all in your name.
Another version of identity theft occurs when someone has enough information to file a fake tax return in your name. They get a refund in your name, and when you go to file your legitimate tax return, you find you can’t get a refund. Someone stole it out from under you.
Some methods people use to get the information required to commit identity theft include:
I just watched a documentary on the dark web, and I will never feel safe using my credit card again!
Luckily I don’t have to worry about that. I have ExtraCredit, so I get $1,000,000 ID protection and dark web scans.
I need that peace of mind in my life. What else do you get with ExtraCredit?
It’s basically everything my credit needs. I get 28 FICO® scores, rent and utility reporting, cash rewards and even a discount to one of the leaders in credit repair.
It’s settled; I’m getting ExtraCredit tonight. Totally unrelated, but any suggestions for my new fear of sharks? I watched that documentary too.
…we live in Oklahoma.
Imposter scams. The scammers email, call or otherwise contact you while pretending to be someone else, such as the IRS. They use that contact to try to get personal information out of you.
Social media scams. Scammers comb social media, looking for personal information people might have shared. They also use direct messages to try to get information from you.
Dark web databases. If your information is included in a data breach, it may be shared or sold to scammers online.
Checking your trash. In some cases, scammers simply go through unshredded documents in the garbage to get the information they need.
When someone uses information in this way to file a fake tax return, it’s a crime called Stolen Identity Refund Fraud. There are serious penalties for this crime. It’s always best to safeguard your private information as much as possible to reduce your risk of becoming a victim.
How to Know if Your Tax Refund Was Stolen
The IRS provides a tool called Where’s My Refund? that lets you track the status of your refund. If you’re worried someone has filed a fake return in your name or tried to steal your refund check, use that tool to see what’s going on with your refund. You can also ask the IRS to do a refund trace to find out more about where the tax refund check or deposit went.
The IRS will also notify you when more than one return is filed in your name for a particular year. If you file a tax return and receive this notice, there’s a good chance some fraud has occurred.
Important Steps to Take after Tax Refund Fraud
If you’ve received a notice from the IRS stating that more than one return has been filed in your name, or if you believe your identity has been used fraudulently, you should act quickly. Follow the steps below.
1. Report the Fraud
If your Social Security number was compromised and you think you may be the victim of tax-related identity theft, file a report with your local police and file a complaint with the Federal Trade Commission at www.identitytheft.gov or by calling the FTC Identity Theft Hotline at 1-877-438-4338.
2. File a Report With the IRS
Once you’ve filed a police report, file an IRS Form 14039 Identity Theft Affidavit. Print the form and mail or fax it according to the instructions.
3. Pay Your Taxes
Be sure to continue to pay your taxes and file your tax return on time, even if you must do so by mailing in paper forms.
4. Check Your Credit Reports and Scores
Just because you were first alerted to the problem through a false tax return doesn’t mean that’s where the ID theft started. A sudden drop in credit scores can be a sign your identity has been stolen. You should also monitor your credit reports for activity that isn’t yours.
You can get a free copy of your credit report from each of the major credit bureaus at AnnualCreditReport.com. You can also check 28 of your FICO scores and get regularly updated information about your credit reports and scores when you sign up for ExtraCredit.
5. Add Fraud Alerts to Your Credit Reports
Contact each credit bureau and add a fraud alert to your credit report. You can do this online or via phone. A fraud alert makes it harder for someone to apply for credit in your name.
6. Close Any Fraudulent Accounts
Reach out to creditors to close any accounts opened in your name fraudulently. You should also report them as fraudulent to the banks and lenders.
7. Change All Your Passwords
Thieves know people use the same password for multiple websites and accounts. Change all your passwords immediately if you believe you’re the victim of identity theft or fraud. It’s also a good idea to change your passwords regularly, even if you aren’t a victim of identity theft.
8. Follow Up on Your Case
If you informed the IRS about taxpayer ID theft and didn’t receive a resolution, contact the Identity Protection Specialized Unit at 1-800-908-4490 about your case. If you’re experiencing financial difficulties because of the delay, you can reach out to the taxpayer advocate service, an independent organization within the IRS, at 877-777-4778.
9. Stay Calm & Be Patient
A typical case of ID theft can take an average of 120 days to resolve, according to the IRS. Remember that the average might not reflect your case, and it could take a year or more to resolve it.
Just remember, the IRS will eventually pay you your refund, but if you’re experiencing financial difficulties because of the delay, you can contact the taxpayer advocate service, an independent organization within the IRS, at 877-777-4778.
File Your Tax Return as Early as Possible
One of the best defenses against this type of identity theft is an early offense. Get your tax return in early to beat potential fraudsters to the punch.
The average tax refund in 2021 was $2,827. And while getting a tax refund often means you overpaid to begin with, that hefty chunk of change hitting your bank account can spawn some great feelings. Before you drop all that dough on your next vacation or an impulse buy, consider whether you can do something more responsible with it. For example, did you know you can use your tax refund to build credit?
How to use Your Refund to Build Credit
6 Tips for Using a Tax Refund to Build Credit
Just getting a decent amount of money in your checking account doesn’t mean your credit goes up. And in reality, there aren’t guarantees about your credit score.
However, here are some tools and methods that tend to move credit in a positive direction or help you impact your score in a positive way over time.
Consider using some of your tax refund to pay for an ExtraCredit account. This subscription lets you get access to 28 of your FICO® credit scores and credit reports from all three bureaus, so you know what’s going on with your credit. Once you gain that access, you can also use some of your tax refund to invest in other tools, getting rewards and potential cash back through ExtraCredit.
For example, if you find your credit score is lackluster and discover that it may be because of inaccurate information on your report, you could invest in credit repair services with a trusted leader in credit repair. If you sign-up through your ExtraCredit Restore It feature, you get an exclusive discount on the credit repair service. Challenging that inaccurate information and getting it corrected could give you a more accurate credit report and possibly improve your score!
2. Get a Secured Credit Card
If you have poor credit and know that everything on your credit report is accurate, you may need to take some other actions to build credit in the future. One option is applying for a secured credit card.
A secured credit card requires you to put a deposit down to secure your line of credit. That’s where your tax refund comes in. Once you use the card and make timely payments for a certain period of time, you may get your security deposit back. You could also get approved for a higher credit limit and/or lower interest rate. And all those timely payments also get reported to the credit bureaus, which can be good for your score. Make sure to choose a card that reports to all of the major credit bureaus.
3. Open a Credit Builder Account
Credit builder accounts are locked savings accounts that work somewhat like loans. The exact way they work varies, but the concept tends to be the same:
You secure a “loan” with a deposit. That deposit is put into a locked savings account and held for you.
You pay the loan as agreed, typically making monthly payments.
The on-time monthly payments are reported to the credit bureaus, and this helps build your credit.
Once you pay off the loan, the savings account is unlocked and you get access to that money.
4. Pay Down Your Debt
Dropping some money on your existing debt can also help improve your credit, especially if it’s revolving credit. That’s because your credit utilization rate plays a big role in your credit score.
Credit utilization refers to the amount of your open credit you’re using. So, if you have a credit card with a $2,000 limit and a balance of $1,000, your credit utilization rate is 50%. That’s considered high.
Using your tax refund to pay down one or more high credit card balances brings down your utilization percentage. That might have a positive impact on your credit.
5. Open a Savings Account
You may already be working on your credit and just worried about making continual progress in the future. In this case, you might want to open a savings account and put the money away to support needs later. You could use the money to ensure you can cover payments on future debts in a timely manner.
6. Pay Any Late Bills
On the other hand, if you’re running late with bills, you might use your tax refund to catch up. That puts you in a better position to make timely payments going forward, which is important for your credit score.
Other Responsible Ideas for Using Your Tax Refund
Of course, you don’t have to use your tax refund to build credit. Perhaps your credit is already good or excellent. In that case, you might want to consider a different type of responsible action with your refund. Here are a few options.
1. Start an Emergency Fund
Put the money away for a rainy day. An emergency savings fund helps you pay for unexpected expenses, such as medical bills or car repairs. Some people like to save up around six months of expenses to help cover a gap if they lose income or a job, and your tax refund might help you jump start such a savings.
2. Invest in Retirement
You might be able to add to your 401(k) or IRA accounts. Instead of putting your tax return directly into those accounts, use your tax return to cover normal daily expenses. Then, up the percentage of your paycheck that goes into your retirement account. That lets you save more while getting a tax advantage on the savings. And if your employer matches retirement contributions, you could save even more.
3. Donate to a Worthy Cause
If you’re already fairly set financially, you may want to support a charitable cause. You could donate to COVID-19 relief funds, your church, or a favorite nonprofit organization. Get a receipt so you can claim the donation on your taxes next year to help potentially increase next year’s refund!
4. Support Small Businesses
Small businesses took a huge hit during the COVID-19 pandemic. If you’re looking to give back with your tax refund and also spurge on yourself, consider making big purchases with small businesses.
5. Invest Some Money
If you’ve ever wanted to invest in the stock market or buy some cryptocurrency, your tax refund might make that possible. Just remember to do your research or consult people who know what they’re doing before you drop all your cash into an investment app.
There’s a lot you can do with tax refund money. You can use your tax refund to build credit, get ahead on debt or treat yourself or your family to something. But before you can do that, you need to maximize your return.
As a parent of a teenager or young adult, you want to ensure that your child is financially secure and understands the importance of taxes. Filing taxes can often be confusing and intimidating, but it’s an important part of life when you start earning income. Once you know a few key concepts, filing your taxes doesn’t have to be so intimidating.
Teens and young adults need access to resources that explain the tax filing process in easy-to-understand language and walk them through their specific filing situation so they know exactly what needs to be done come tax time. Today, we’ll cover taxes from a young adult perspective and discuss how learning about this important financial component now can help prepare for future success.
Explain the basics of filing taxes and why it’s important for young adults
Filing taxes can seem daunting for young adults, but it’s an essential part of financial responsibility that shouldn’t be overlooked. Simply put, it’s a way for the government to ensure that they’re collecting the appropriate amount of money from individuals and businesses alike. When you file your taxes, you’re essentially reporting your income for the year and any applicable deductions you may have. It’s important to file because if you don’t, you could end up facing penalties. Additionally, filing can help you receive a refund if you overpaid taxes throughout the year. Even if you’re just beginning work, there could be money for you to claim.
Don’t let the tax season stress you out–it’s an opportunity to reflect on your own financial literacy throughout a calendar year.
Educate yourself on why and how we pay taxes
Sometimes the toughest part of filing taxes can be knowing where to start. Young adults need to learn if they should file, when to file, how to file, and what all those numbers across a paycheck mean.
Did you know that more income doesn’t necessarily mean a higher tax rate? It just means that only income over a certain amount will be taxed higher. What forms should you keep an eye out for in January? What can you do throughout the year to make paying your taxes easier? Sometimes, we’re left with more questions than answers, and these are just a few of the questions that are critical for building financial stability and health as your resume grows.
Knowing when and how to file
Knowing when and how to pay and file taxes is crucial to staying organized and on top of your responsibilities. It’s important to understand how you pay taxes throughout the year and when you need to file. This can depend on many factors including your job, income, or where you live. Secondly, figuring out how to file can seem overwhelming, but there are many resources available to help you navigate the process. Government websites or tax professionals can provide guidance and assist you in filling out necessary paperwork. Remember, filing taxes might seem overwhelming, but with a little research and support, you can successfully manage this responsibility – just don’t miss that Tax Day deadline!
Understanding your paycheck
A paycheck is an important part of understanding your taxes. Your paycheck outlines your gross pay, taxes deducted from your income, and the final amount of take home pay that you actually receive in cash or check form. The gross pay includes regular wages, any overtime wages. Also included on your paycheck are mandatory and optional deductions which are taken directly from your paycheck before the final amount of take home pay is calculated.
The look of your paycheck can often explain what forms to look out for at the start of tax season. Whether you’re receiving pay stubs from an employer or submitting invoices as a freelancer, it’s important to hold on to this important paperwork to keep track of what you owe and what you’ve paid. Once all deductions are included, the net amount of your paycheck is what you will receive as take home pay.
Tax season can be stressful, but it doesn’t have to be! All it takes is some time to know what to do and why you’re doing it. In just an hour, anyone can build confidence to not feel intimidated every time tax season comes around. It’s something we’ll do for the rest of our lives – so why not take the stress out of it?
Studies show that college tuition increased by 134% at private colleges and 175% at public universities from 2003 to 2023. So, for many families, these rising costs are making it harder to afford a college degree. To help cover these costs, many families and students start saving for college to help avoid student loans. There are many options you can use to help save money for college. For example, a 529 savings plan is specifically designed to help families save for college. However, this type of plan isn’t right for everyone. Keep reading to learn more about the pros and cons of 529 plans.
Quick Answer: 529 plans are tax advantaged savings plans to help pay for educational expenses.
In This Piece
What Is a 529 Plan?
A 529 plan is a college savings account. It provides parents, grandparents and even other interested parties a tool for saving money for their loved one’s college. In some cases, prospective students may be able to set up their own 529 accounts. The goal of a 529 plan is to save money for several years and then use this money to cover the costs of college. Similar to an IRA account, a 529 plan is an investment account. So, you have the potential to earn interest over the years.
Types of 529 Plans
There are many 529 plans to choose from but only two basic types. The most popular type of 529 plan is the savings plan. With this type of plan, you can use the money you save for tuition and related costs at any eligible university. In fact, you can even use these funds to cover private school expenses for grades K-12.
The second type of 529 account is a prepaid tuition plan. With this type of account, you’re prepaying tuition fees now to cover the cost of attendance later. The benefit is that you can lock in tuition rates well before going to college. The downside is that you’re limited to which universities and colleges the student can attend.
Tax Advantages of 529 Plans
Unlike 401(k) plans, you make 529 contributions with post-tax dollars. However, many states offer tax credits or tax deductions on annual contributions made to 529 plans. The good news is that distributions from 529 plans are tax-free as long as the money is used for qualified educational expenses.
How to Open a 529 Plan
Once you know what type of 529 plan you want to invest in, you should compare various options. Be sure to review all costs involved when making this comparison. If your state offers tax credits or deductions for 529 accounts, you may want to select an in-state plan.
When you’re ready, you can handle the application process yourself or seek the support of a financial advisor who can manage the account for you. If you have concerns about debt collectors having access to your 529 account funds, you may want to speak to a financial advisor about setting up an estate.
Once the account is open, you can make regular contributions to it throughout the year. There are also some 529 credit cards that automatically transfer cashback rewards to a 529 plan.
Who Can Open a 529 Plan?
Anyone can open a 529 plan, including parents, grandparents, aunts, uncles, and other friends and family members. You do have to designate a beneficiary for the funds in the account. Keep in mind that you may face a 10% penalty if you use the money for any purpose other than a qualified expense.
How Much Does a 529 Plan Cost?
The cost of maintaining a 529 account varies from plan to plan. You can expect to pay a variety of fees, including enrollment fees and account management fees. If you work with a broker, you may also incur brokerage fees.
How Much Can I Contribute to a 529 Plan?
There are no annual limits to how much you can contribute to a 529 plan. However, for IRS purposes, contributions up to $17,000 (for 2023) can qualify as a gift. You or a loved one, such as grandparents, can also superfund 529 plans with lump-sum contributions of up to $85,000, but it must be prorated over the next 5 years.
How Many Times Can You Superfund a 529?
There’s no limit to how many times you can superfund a 529 plan. However, you can’t exceed the state’s aggregated limits and shouldn’t contribute more than the gift limit for the year.
How Much to Save for College
According to recent studies, the average cost of college tuition and fees is $10,423 per year for public college and $39,723 per year for private college. If you plan to attend college in state, you may want to view the state’s aggregate limits, which are based on average tuition costs in the state. Once the 529 account balance reaches this maximum level, you can’t make any more contributions.
Who Maintains Control Over a 529 Plan?
The person who sets up the account maintains full control over the 529 account. The owner of the account determines when funds are distributed and the amount of each distribution. The funds must go to the beneficiary, but the owner of the account has the ability to change the beneficiary.
Does a 529 Affect Financial Aid?
When completing the Free Application for Financial Student Aid (FAFSA), you list funds in a 529 account as an asset. If this is a parent’s account, it typically has little impact on financial aid eligibility. However, if the funds come from an account established by a grandparent or other party, it’s treated as cash support. Depending on the value of these funds, these contributions can have a significant impact on eligibility for financial aid.
Qualified Expenses
For distributions for a 529 account to be tax-free, the student must use the funds for qualified expenses. These expenses include:
Tuition
Room and board
Textbooks
Computer
School supplies
How to Withdraw Funds
Funds can be withdrawn at any time by completing the required withdrawal form. Also, keep in mind that only qualified expenses are tax-free. Before requesting a withdrawal, be sure to calculate all your expenses to avoid taking out too much money. You also need to take the money out of your account the same year it will be used.
What If the Child Doesn’t Go to College?
It’s important to understand that you don’t lose your money if your child decides not to go to college. You have two options. First, you can transfer these funds to another beneficiary, such as another child or grandchild. Secondly, you can withdraw the funds.
What Happens to Money Not Used?
If you choose not to use these funds on qualified expenses, you’ll face a 10% penalty and you must pay taxes on all distributions. But, there are some exceptions to this rule. If your child receives a scholarship for college, enters the military academy, or becomes disabled and unable to attend college, you may be able to waive the 10% penalty.
Alternatives
There are a few alternatives to 529 college savings accounts, such as:
Custodial brokerage account. A custodial brokerage account doesn’t provide any extra tax benefits. However, it does give you the freedom to save as much as you want and use it for any purpose.
Roth IRA. A Roth IRA is typically for retirement savings, but in many cases, you can also withdraw funds without penalty for education purposes. However, this account does have annual contribution limits.
Cordell education savings account. The Cordell education savings account is similar to a 529 plan. But, there are strict income eligibility guidelines. Additionally, you can only contribute $2,000 per year per child.
Acorn Early. Help your child start investing money early with Acorn Early to help pay for college.
With a little planning and dedication to maintaining regular savings goals, you can help your child pay for college expenses more easily. Understand the pros and cons of 529 plans before moving forward.
When preparing your taxes for the 2022 tax year, one thing you’ll need to know is your tax bracket. The IRS uses these tax brackets to identify your tax rate and determine how much you owe in taxes. This guide provides more information about these tax brackets and how they work. Keep in mind that this guide covers only general information. For more specific information regarding your personal taxes, it’s best to meet with a tax adviser.
In This Piece
2022 Marginal Tax Brackets
To determine your tax bracket, you first need to know your filing status. There are currently five different IRS tax filing statuses: single, married filing jointly, married filing separately, qualified widow(er) and head of household. Additionally, the IRS divides these tax brackets into seven tiers that range from 10% to 37%, which are based on taxable income ranges.
2022 Tax Brackets for Married Filing Jointly and Qualifying Widow(er)s
Tax Bracket
Taxable Income
How Much You Might Owe (rounded to the nearest dollar)
10%
$20,550 and under
10% of taxable income
12%
$20,551 to $83,550
$2,055 plus 12% of taxable income over $20,550
22%
$83,551 to $178,150
$9,615 plus 22% of taxable income over $83,550
24%
$178,151 to $340,100
$30,427 plus 24% of taxable income over $178,150
32%
$340,101 to $431,900
$69,295 plus 32% of taxable income over $340,100
35%
$431,901 to $647,850
$98,671 plus 35% of taxable income over $431,900
37%
$647,851 and over
$174,253.50 plus 37% of taxable income over $647,850
2022 Tax Brackets for Individuals and Married Filing Separately
Tax Bracket
Taxable Income
How Much You Might Owe (rounded to the nearest dollar)
10%
$10,275 and under
10% of taxable income
12%
$10,276 to $41,775
$1,027.50 plus 12% of taxable income over $10,275
22%
$41776 to $89,075
$15,213.50 plus 24% of taxable income over $89,075
24%
$89,076 to $170,050
$29,502 plus 24% of taxable income over $172,750
32%
$170,051 to $215,950
$34,647.50 plus 32% of taxable income over $170,050
35%
$215,951 to $539,900
49,335.50 plus 35% of taxable income over $215,950
37%
$539,901 or more
$162,718 plus 37% of taxable income over $539,900
2022 Tax Brackets for Head of Household
Tax Bracket
Taxable Income
How Much You Might Owe (rounded to the nearest dollar)
10%
$14,650 and under
10% of taxable income
12%
$14,651 to $55,900
$1,465 plus 12% of taxable income over $14,650
22%
$55,901 to $89,050
$6,415 plus 22% of taxable income over $55,900
24%
$89,051 to $170,050
$13,708 plus 24% of taxable income over $89,050
32%
$170,051 to $215,950
$33,148 plus 32% of taxable income over $170,050
35%
$215,951 to $539,900
$47,836 plus 35% of taxable income over $215,950
37%
$539,901 and over
$161,218.50 plus 37% of taxable income over $539,900
How Tax Brackets Work
The United States uses a progressive tax system. In basic terms, this system increases a taxpayer’s tax liability as their taxable income rises. Simply put, the higher your taxable income, the higher the amount of taxes you can expect to pay.
There are four factors impacting these tax brackets: filing status, adjusted gross income, deductions and taxable income. Each of these factors is discussed below.
Filing Status
The IRS designates five different filing statuses:
Single: Taxpayers who aren’t married and weren’t married at any point in 2022.
Married Filing Jointly: Married couples who combine their income, deductions and credit by filing their tax return together.
Married Filing Separately: Married couples that choose to file their tax returns separately rather than jointly.
Qualified Widow(er): Widow(er)s who haven’t remarried and have a qualified dependent may be able to file as a qualified widow(er) for the two years following the year their spouse dies.
Head of Household: Unmarried taxpayers with a qualifying dependent.
You may qualify for more than one tax filing status. It’s important to evaluate your options and determine which status provides the greatest tax benefits.
Adjusted Gross Income
Your adjusted gross income is the difference between your total gross income and any qualifying adjustments. You can calculate your AGI by taking your total gross income for the year and subtracting any qualifying deductions. However, if you work with a tax preparer or use an online tax preparation service, these services will automatically calculate your AGI based on your answers to a series of questions regarding your finances.
It’s important to note that your AGI doesn’t determine your tax bracket. Instead, you can use your AGI to determine what tax deductions you may be eligible for. With this information, you can then calculate your taxable income, which is done by taking your AGI and subtracting all eligible deductions.
Deductions
Taxpayers have the option of taking either a standard deduction or itemizing their deductions. A standard deduction is a flat amount based on your specific filing status. Itemized deductions, on the other hand, require you to complete Schedule A and make a list of your qualifying deductions.
Using the standardized deduction is the easiest and most popular route. However, you may be able to decrease your tax liability by itemizing your deductions instead. It’s important to evaluate your specific situation to determine which option is best for you.
Here’s a look at the standard deduction amounts for the 2022 tax year.
Single: $12,950
Married Filing Jointly: $25,900
Married Filing Separately: $12,950
Qualifying Widow(er): $15,900
Head of Household: $19,400
Taxable Income
Once you calculate your AGI, you can subtract your standard or itemized deduction from your AGI to determine your taxable income. For instance, if you’re married and filing jointly with a combined income of $120,000 and you choose to take the standard deduction, your taxable income would be $94,100.
Examples of AGI and Federal Tax Brackets in Action
Now that you understand how to calculate your taxable income, let’s look at a few examples.
Jane has an AGI of $64,500 and is filing as head of household. She opts for the standard deduction of $19,400, bringing her taxable income to $45,100. Using the tables above
She owes 10% of the first $14,650, or $1,465.
Plus 12% on $30,450, the remainder of her income, or $3,654.
This brings her tax liability to $5,119 before any eligible credits.
Sarah and John have a combined income of $126,700 and their status is married filing jointly. They opt for the standard deduction of $25,900, which brings their taxable income to $100,800. Using the tables above:
They owe 10% of the first $20,550, or $2,055.
Plus 12% on $63,000, the amount of their income between $20,550 and $83,550, or $7,560,
Plus 22% on $17,250, which represents their income over $83,550, or $3,795.
This brings their total tax liability to $13,410.
Just because you have a big tax liability, it doesn’t necessarily mean you’ll owe a lot of money at the end of the year. In most cases, taxes are taken from every paycheck. You can deduct this amount from your total tax liability. For example, if Sarah and John, in the example above, paid $12,000 throughout the year from their wages, they’d only owe $1,410 when they file their taxes.
If, however, you do have a big tax liability, you may want to talk to a tax adviser, because how you pay your taxes could impact your credit score.
Tax Brackets and State Income Tax
States have the freedom to set their own personal income tax rules, which may or may not be similar to the federal tax system.
Of the 50 states, eight have no state personal tax:
Alaska
Florida
Nevada
South Dakota
Tennessee
Texas
Washington
Wyoming
An additional nine states use a flat rate system, where all taxpayers pay the same percentage of their income. These states are:
Colorado
Illinois
Indiana
Kentucky
Massachusetts
Michigan
North Carolina
Pennsylvania
Utah
The remaining 33 states, along with the District of Columbia, use a progressive tax scale similar to the one the IRS uses.
Maximize Your Tax Return
Understanding how the tax brackets for 2022 work can help you maximize your tax return and minimize your overall tax liability. You can use tax preparation software now to enter your anticipated information to estimate your tax liability now. Additionally, there are several ways you can file your taxes for free to help save you even more money.
Learn more about preparing your taxes with this tax guide.
If your income falls under a certain amount, you could be eligible for a special credit by putting money into qualified retirement accounts. It’s called the saver’s credit, and it started in 2018. Wondering if you qualify? We’ve got all the information you need about the saver’s credit for 2022 tax returns and the 2023 tax year so you can maximize potential tax savings.
But before we dive in, a quick note: if you have specific questions about your taxes, you might want to consult with a tax adviser. We’re not tax professionals, so you should always check with a tax expert before you make any big decisions.
In This Piece
What Is the Saver’s Credit?
The saver’s credit is a tax credit that can reduce how much you might owe the IRS come tax return time. Depending on how much you make, you may be able to get a nonrefundable credit for 10%, 20% or 50% of qualified contributions you made to retirement funds within the tax year.
The purpose of the saver’s credit is to provide an incentive for people with lower incomes to save for retirement. The credit only applies up to $2,000 worth of contributions. At the maximum credit percentage of 50%, that’s a $1,000 credit.
How Does the Saver’s Credit Work?
The saver’s credit is nonrefundable. That means it reduces how much you might owe the IRS. If you owe the IRS less than the credit amount, your tax bill is $0. Check out the details below to understand who’s eligible for the credit and how to tell how much your saver’s credit might be.
Who Qualifies for the Saver’s Credit Income Limits
The saver’s credit income limits determine who’s eligible for the credit and at what percent. Some other qualification details apply too. You must be at least 18 years old, not claimed as a dependent on anyone else’s return and not a full-time student.
To qualify for the 2022 saver’s credit, you must make less than $68,000 as a married couple filing jointly, less than $51,000 as head of household or less than $34,000 if you’re filing as any other type. The thresholds go up a bit for the 2023 calendar year. You must make less than $73,000 as a married couple filing jointly, less than $54,750 as head of household or less than $36,500 as a filer of any other type.
These income limits are for receiving any type of saver’s credit at all. The amount of your credit is further defined by income. Saver’s credit amounts are based on adjusted gross income, which is the taxable income reported on your return.
How Much Is the Saver’s Credit?
The saver’s credit is 10%, 20%, or 50% of your contribution to a qualified retirement account up to a certain amount. Check out the tables below to understand what your credit percentage might be for 2022. Find your filing status and adjusted gross income, then look at the bottom row of the column to see the percentage of contributions you can claim.
2022 Tax Year
Married Filing Jointly
$41,000 or less
$41,001-$44,000
$44,001-$68,000
More than $68,000
Head of Household
$30,750 or less
$30,751-$33,000
$33,001-$51,000
More than $51,000
Other Filing Types
$20,500 or less
$20,501-$22,000
$22,011-$34,000
More than $34,000
50%
$20%
10%
0%
Source: IRS.gov
To understand how saver’s credit amounts work, consider an example. Sue makes $32,000 per year as a single person. She put $3,000 in her qualified retirement fund. Saver’s credits only take the first $2,000 of contributions into account, so Sue would get a credit of 10% of the $2,000. That’s $200.
In another example, Joe is married. He makes $40,000 and his spouse doesn’t have an income. Joe puts $2,000 in a retirement fund. He would get a credit of 50% of $2,000, which is $1,000.
What Types of Retirement Accounts Qualify?
Only your own contributions are factored into the credit calculation. Match contributions from your employer don’t count. Contributions must also be made to the following account types to qualify:
Traditional or Roth IRA
401(k)
403(b)
Governmental 457(b)
SARSEP
SIMPLE plan
Federal Thrift Savings Plan
501(c)(18)(D) plan
An ABLE account for which you are the designated beneficiary
Does the Saver’s Tax Credit Increase Your Refund?
The saver’s tax credit doesn’t increase your refund, as it’s a nonrefundable credit. It only reduces the amount you owe in taxes, so it’s not a tool for getting a maximum tax refund. However, if you’re looking for tips on how to maximize your 401(k) benefits, reducing how much you have to pay in taxes is certainly one advantage of those contributions.
For example, if you owe $1,200 and have a saver’s credit of $1,000, you’d only need to pay $200. If you owe $500 and have a saver’s credit of $1,000, you pay nothing, but you don’t get the extra $500 back.
It’s also important to know that the saver’s credit isn’t a tax deduction. It doesn’t reduce the income you’re taxed on.
Manage Finances Well All Year
One of the best ways to minimize your taxes is to manage your finances wisely all year. This is a great way to minimize costs associated with things like interest and help you save money.
And while you’re taking charge of your finances this year, consider signing up for ExtraCredit®. You can get access to 28 of your FICO® scores and all three of your credit reports. Your subscription also includes features such as Reward It, which lets you earn cashback for completing offers or signing up with partners.
While federal or state tax debt doesn’t show up on your credit report, it can have an impact on your credit down the line. Find out more about how tax debt impacts your credit, including your ability to pay debts and get loans, below.
In This Piece:
Does the IRS Report to the Credit Bureaus?
The IRS doesn’t report tax debt or payments to the credit bureaus. So, your credit won’t take a direct hit if you’re late on a tax payment. At the same time, you won’t get any sort of positive credit impact for making payments on tax bills on time.
Credit bureaus only report items that are reported to them. Creditors, such as banks and credit card companies, report account information to one, two or three of the credit bureaus. They aren’t required to report to any or all of them, which is why your credit report can be different with each major bureau. The IRS doesn’t report at all, even if you sign an agreement with them to pay off your tax debt in installment payments over time.
Tax liens, which are public records, used to show up on credit reports and seriously impact credit scores. However, in April 2018, the three major credit bureaus agreed to remove tax liens and some other types of public records from credit reports, so they no longer show up.
Consequences of Not Paying Your Taxes or Paying Them Late
If you don’t pay your taxes on time, you can incur interest, fees, and penalties. These amounts substantially drive up how much you owe in taxes, leaving you struggling financially to manage your budget. You might miss payments on other types of debt as you try to pay taxes, and those other missed payments may be reported to the credit bureaus. That can reduce your credit score.
Another tactic for paying off rising tax debt involves taking out a personal loan or using credit cards. This can increase your credit utilization ratio, which can also drive down your credit score.
Tax Liens
If you go for a period of time without paying your taxes or making arrangements with the IRS to do so, the federal government may issue a tax lien. This is true for state tax debt too.
Tax liens are assessed on property you own, such as a home or car. A lien puts the IRS or other tax agency in line to receive profits from the sale of the property in the future. For example:
Levies
Another consequence of not paying your taxes can be a levy. A levy occurs when your property is seized to cover a tax debt. Types of properties that might be levied include homes, cars, certain types of personal property and even cash in bank accounts.
Wage Garnishments
The IRS may also be able to get an order for a wage garnishment. This means a certain amount of every paycheck is paid to the IRS by your employer, reducing how much you take home.
Problems Getting a Loan
While tax debt doesn’t get reported to the credit bureaus, liens are public record. Lenders can look up public records to find out if you have any tax liens, and this can inhibit your ability to get a loan. This is especially true if you’re trying to get a mortgage. Lenders usually require that you make good on any existing tax liens before you can qualify for a mortgage.
What to Do When You Can’t Pay Your Taxes on Time and in Full
None of these consequences occur just because you can’t pay your taxes in full on April 15 of the year. The IRS has programs in place to help people pay their tax debt over time. It’s important to communicate with the IRS as soon as you know you can’t pay your tax debt so you can get an installment plan. If you’ve never had an installment plan and your tax debt is under a certain threshold, you can usually qualify automatically for a payment plan.
Do What’s Best for Your Finances
It’s important to consider your entire financial picture when making decisions about your taxes. If you owe a lot of money to the IRS, consider reaching out to a tax attorney or professional to find out if there are any relief programs you might qualify for. And keep an eye on your credit so you understand what’s impacting it and how you might improve it. Get started with ExtraCredit to see your credit reports and 28 of your FICO scores.