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NOTE: Due to the COVID-19 coronavirus pandemic, the IRS has extended the federal tax filing and payment deadline to July 15, 2020. The recent relief package passed by Congress may have additional tax implications. Please contact a tax adviser for information you may need to complete your taxes this year. Learn more.
It’s a good thing to be punctual, especially when it comes to your finances. Your credit score relies heavily on your payment history, so developing a habit of making on-time payments helps you improve and maintain high credit scores.
While tax information isn’t generally reported to credit bureaus, missing the deadline for paying the IRS could result in a tax lien, which could seriously damage your credit score. But in general, that’s the only way tax-related information goes on your credit report.
How Taxes Affect Your Credit Score
Everything from how long you’ve had credit accounts to your payment history and credit utilization ratio affects your credit score. If you’re trying to keep your credit on the upswing, you also want to ensure you understand how taxes can affect your score. Here are a few common questions when it comes to taxes and credit.
- Does paying taxes build credit score? No, taxes aren’t generally reported to your credit unless there’s a problem, such as a tax lien. Paying your taxes every year or making payments as promised as part of an agreement with the IRS won’t help you build credit.
- Do taxes affect your credit score? Taxes only affect your credit score when a lien is placed. When this happens, it can mean a hit to your score. If you currently have a tax lien on your credit report, your credit score will increase once it’s paid off and removed.
- Does a late payment for property taxes affect credit score? Paying your property taxes late won’t immediately go on your credit report or affect your credit score like it does when you don’t make a credit card or loan payment. When you’re late on your property taxes, the county you live in can eventually put a lien on your house. Once the lien is in place, it will show up on your credit report and can take down your credit score by quite a bit.
As a general rule, it’s important to pay your taxes promptly. For property taxes, many people take advantage of an escrow account that handles this for them. If you’re paying on your own, it’s easy for that annual or twice-yearly bill to sneak up on you.
As for income tax, if you’re left with an end-of-year tax bill, pay by the April 15th deadline. Or, make payment arrangements with the IRS to protect your credit and avoid a tax lien.
What’s a Tax Lien?
If you don’t pay your taxes, the IRS can file a notice of federal tax lien with the credit bureaus. That’s a huge negative on your credit reports. If you owe more than $10,000, the IRS automatically files the lien after taxes have gone unpaid for 30 days. At that point, you could see a dip in your credit scores.
But this doesn’t mean there’s nothing you can do. The IRS has plan that automatically deducts monthly payments from your bank account until the taxes have been paid. If an eligible taxpayer has enrolled in the installment plan, they can request the lien be withdrawn. Unlike other debts, the IRS installment plan payments will not be reported to the credit bureaus, so that aspect of the lien will not impact your credit.
There are other ways unpaid taxes could hurt your credit score, which is why you should carefully consider your payment options. Failing to pay your taxes on time may not always hurt your credit score, but it could contribute to credit problems.
Missing the April 15 deadline may subject you to late-payment penalties, which the IRS outlines on its website. You’ll end up having to pay more, and the effect of added expenses could put a wrinkle in your ability to meet other debt obligations. If you owe a lot, your payments could be sizable, which can make it harder to make your regular monthly budget work. If you start getting behind on other payments, such as a credit card and auto loan, because of your tax payments, your credit score can be seriously impacted.
What Happens If I Owe More Taxes Than I Can Pay?
If you decide to pay your taxes with a credit card or personal loan, there’s the potential you could see some negative impact on your scores. Adding to your debt load can affect your credit scores as it raises your credit utilization. If you end up struggling to repay the loan, a poor payment history will have a similarly negative effect.
When considering paying your taxes, take a look at your credit score. You can see a score for free using Credit.com’s Credit Report Card. It could help you determine whether you can afford to temporarily add to your debt load or if you can qualify for a personal loan.
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