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The LIBRE Institute - Managing Your Money & Taxes
- 1. Taxes and Your Credit Score Presented by
- 2. H&R Block is one of the world’s largest tax services providers. We are not a government entity and we are not the IRS. We have been serving the Latino community since 1955. We have offices in the U.S., Puerto Rico, Canada, Australia and other countries. Who is H&R Block? 2
- 3. We have over 8,000 bilingual tax professionals who communicate in English and Spanish. We have over 2,500 offices located in the heart of predominantly Latino communities. We served over 1.2 million Latino clients this past tax season. 3 Who is H&R Block?
- 4. H&R Block Tax Professionals are rigorously trained and deliver exceptional tax expertise. We prepare federal, state and local tax returns for individuals and businesses. We also offer other services such as ITIN* (Tax ID) application services, small business services and related financial solutions. 4 What does H&R Block do? *Please note H&R Block does not offer immigration services.
- 5. Valid identification card (specify) Social Security Number (SSN) or your ITIN (Tax ID) Income reporting documents (W-2, 1099-MISC, etc.) Information on your spouse, children and other dependents (SSN or ITIN, dates of birth, etc.) Additional documents (see checklist). 5 What do you need to file taxes?
- 6. ITIN is an Individual Taxpayer Identification Number. Also known as “Tax ID” or “Taxpayer ID.” If you earn money in the United States, but you don't have or qualify for a Social Security Number, you can apply for an ITIN from the IRS for you and your dependents in order to file your tax return. 6 What is an ITIN?
- 7. It serves as your identification number for filing your federal taxes. If you do not qualify to have a Social Security Number, you will need an ITIN to file your tax return. Filing a tax return may allow you to get a refund of your income tax withholding, if you qualify. When you file your taxes, you can claim dependents you support in Mexico or Canada. • You must have sent more than 50% of the support they need to live and must meet certain other requirements. • Documentation of support for dependents is recommended. • Claiming dependents may provide a larger tax refund. 7 Why should you get an ITIN?
- 8. With an ITIN you may be able to open a bank account or apply for a mortgage loan. By using your ITIN number to apply for loans or credit cards you can begin to establish a credit history in the United States. 8 Additional Benefits
- 9. Tax-deductible interest • Borrowers of money may deduct the interest paid on certain types of loans • Mortgage interest deductions • Student loan interest deductions • Business expense deductions • Investment expense deductions Lenders of money usually need to report interest earned on a loan as income Bad debt • A loss that results from the failure of a debtor to repay a loan • The taxpayer who made the loan can sometimes deduct the amount of the bad debt for income tax purposes 9 Debt Deductions
- 10. Using a Credit Card • Debt can affect your credit score • Advantages − Convenient way to pay your tax bill, especially if you file your return electronically − Earn credit card rewards or cash back • Disadvantages − IRS fees to a third-party payment processor > Processors charge between 1.88% and 2.35%, which would add $94 to $117.50 to a $5,000 tax bill; minimum credit-card fee ranges from $2.99 to $3.95 − Credit card interest if you don't pay off your balance before the due date − Your credit score could decrease if the amount you charge to your card puts you near your credit limit Using a Debit Card • IRS fees to a third-party payment processor − Flat fee is $2.99 to $3.95, depending on the payment processor − However, two of the payment processors charge a percentage (1.88% or 2.35%) if you use a MasterCard debit card rather than a flat fee 10 Paying Your Taxes with a Card
- 11. P2P Loans • “Personal” or “Peer to Peer” loans • Typically reported as installment loans • Can be helpful as a credit reference Mortgage Loans • Options are available for prospective home buyers with little or no credit 11 Paying Your Taxes with a Loan
- 12. If you file your taxes late, you may be subject to penalties and interest Between you and the government; credit reporting bureaus are not notified Two different types of payment with IRS • IRS Installment Plan − Lets you pay the tax you owe in monthly installments − Charges a set up fee and interest − In most cases, these payment plans don’t appear on your credit. However, if you owe a large amount, you could wind up with a Notice of Federal Tax Lien filed against you, and that will definitely affect your credit. • Number of Days − If you can pay off your debts within a certain number of days (usually between 30 and 120 days), you may be able to avoid the fees that come with the installment plans, and will typically end up paying less in interest and penalty charges. 12 Late Tax Payments
- 13. Financial Hardship • For instance, if you recently lost your job and paying your taxes would cause financial hardship, it might be difficult to know how much you can pay back month-to-month. • You can request that the IRS extend the due date of filing your return by six months. • However, interest can still accrue on any unpaid tax due at the April 15th deadline. Offer In Compromise • Lets you settle your tax debt for less than you owe, if you can prove you don't have the means to pay and it is very unlikely that you ever will • This is discretionary on the part of the IRS, which only accepts about 25% of the submitted applications 13 Late Tax Payments
- 14. Tax debt does not always affect credit • Finding out that you owe the IRS money • Filing an extension • IRS Payment Plan or Offer in Compromise But sometimes it does • When you don’t have the money to pay what you owe • You don’t work out a solution and your debt remains unpaid • The IRS can choose to file a federal tax lien in court to try to ensure repayment • In order for this to happen, your debt generally has to exceed a certain threshold—right now that’s $10,000 14 How Taxes Affect Your Credit Score
- 15. If you file your tax return expecting a refund, but are told by the IRS that your refund has already been issued A problem that’s expected to reach $21 billion during the next five years and the IRS is not doing a lot at this point to protect taxpayers Won’t automatically affect your credit reports Place a fraud alert or credit freeze on your credit reports 15 Tax-Related Identity Theft
- 16. Removing a tax lien • Tax liens are considered very negative • Effect on your credit score depends on how old the lien is − A tax lien will stay on your credit until it’s paid in full − Generally can’t be discharged in bankruptcy − The longer you let past years’ taxes sit unpaid, the harder it will hit the rest of your life > Until recently, tax liens remained on credit reports for seven years from the date they were paid or satisfied > Under the IRS Fresh Start program announced in early 2011, you can request that the IRS withdraw the lien if you have paid or satisfied the tax debt. This is not something that happens automatically. You must ask. • The sooner you pay your past tax, the sooner it can stop affecting your life • Patience; extremely time-consuming process 16 Rebuilding Credit
- 17. Removing a tax lien • When paid in full − Request, in writing, that the IRS notify credit reporting agencies, creditors or financial institutions − Also make request for removal to credit bureau − Check property records to be sure the lien isn’t showing up against the property 17 Rebuilding Credit
- 18. Importance of a trusted, trained tax professional • Receives on-going training • Experienced • Registered with IRS as required by law • Available year-round • Guarantees accuracy of their work, paying penalties and interest if they made or caused an error on your tax return • Available for consultation in the event you are audited 18 Seek An Expert
- 19. Visit us online at hrblock.com/espanol. Call us at 1-800-HRBLOCK (800-472-5625). 19 Contact us!
Notas do Editor
- Debt can impact federal income taxes in a number of ways. Borrowers of debt may be deduct the interest paid on a loan. Lenders of debt usually need to report interest earned on a loan as income. Debt taken out against a principal residence can give rise to tax-deductible interest. The mortgage interest deduction is available for two types of debts. Interest on a mortgage used to buy, build, or substantially improve a primary residence is tax deductible up to $1 million of debt. Interest on other home equity mortgages is tax deductible up to $100,000 of debt. Similarly, debt on rental properties generates tax-deductible interest against rental income. Student loan debt can give rise to tax deductible interest. The student loan interest deduction is available for up to $2,500. The deduction is limited to taxpayers with incomes under under $70,000 or under $145,000 for married persons filing a joint tax return. Debt incurred in a trade or business also gives rise to tax deductible interest. The loan proceeds must be used for business expenses. Margin loans taken out against investments can generate a deduction for investment interest expenses. Lenders of debt usually need to report interest earned on a loan as income Bad debt A loss that results from the failure of a debtor to repay a loan The taxpayer who made the loan can deduct the amount of the bad debt for income tax purposes The money loaned must have been reported as income on a tax return Taxpayer must prove that the debt became worthless during the tax year for which they claim the deduction for the bad debt If the loan is subsequently repaid, a recovery for the bad debt must be included in the taxpayer's income in the year it is received The debt must be a “bona fide” debt, with evidence to support, such as a written document. Loans between family members are typcially classified as gifts, rather than bona fide debts.
- if you are going to borrow from another source such as credit cards or a personal loan to pay your taxes, keep in mind that debt can affect your credit scores; How much it will hurt (or help) your scores depends on everything else in your credit reports. Implications of paying taxes with a credit card Advantages Using a credit or debit card might seem like a convenient way to pay your tax bill, especially if you file your return electronically And it could be especially tempting if you have a rewards credit card that will rack up points or earn you cash back Disadvantages You'll pay a fee to a third-party payment processor contracted by the IRS to handle credit-card transactions (processors charge between 1.88% and 2.35%, which would add $94 to $117.50 to a $5,000 tax bill; minimum credit-card fee ranges from $2.99 to $3.95) You'll pay interest to your credit card company if you charge your taxes and don't pay off your balance before the due date Your credit score could take a hit if the amount you charge to your card puts you near your credit limit You'll pay a fee for using a debit card, too. The flat fee for paying your tax bill with a debit card is $2.99 to $3.95, depending on the payment processor. However, two of the payment processors charge a percentage (1.88% or 2.35%) if you use a MasterCard debit card rather than a flat fee. So if you can afford to pay your tax bill, you'll be better off mailing the IRS a check or having funds automatically withdrawn from your bank account.
- You can look into a small loan from a P2P service. These loans are typically reported as installment loans, which can be helpful for rounding out your credit references. if you have a specific goal in mind, such as buying a home, talk with a loan officer. There are decent mortgage programs available for prospective home buyers with “thin files” (in other words, not a lot of credit).
- If you file your taxes late, you may be subject to penalties and interest--but that's between you and the government. The credit reporting bureaus are not notified Two different types of payment with IRS The IRS installment plan lets you pay the tax you owe in monthly installments; it charges a set up fee and interest, but those rates combined still might be lower than what you'd pay your credit-card company; In most cases, these payment plans don’t appear on your credit. However, if you owe a large amount, you could wind up with a Notice of Federal Tax Lien filed against you, and that will definitely affect your credit. If you can pay off your debts within a certain number of days (usually 30 to 120 days), you may be able to avoid the fees that come with the installment plans, and will typically end up paying less in interest and penalty charges. Depends on the situation. Not automatic – must be requested through the IRS web site.
- You have more options if you can’t commit to a steady payment plan or a short extension. For instance, if you recently lost your job and paying your taxes would cause financial hardship, it might be difficult to know how much you can pay back month-to-month. If this is the case, you can request that the IRS extend the due date of filing your return by six months. However, interest can still accrue on any unpaid tax due at the April 15th deadline. Offer in Compromise, and it means that you and the IRS could agree upon a repayment that may even be less than your actual owed debt. This is discretionary on the part of the IRS, which only accepts about 25% of the submitted applications; A so-called offer in compromise lets you settle your tax debt for far less than you owe, if you can prove you don't have the means to pay and it is very unlikely that you ever will
- Your credit score won’t immediately be affected by your tax debt, even if you’ve entered into a payment plan or worked out an Offer in Compromise with the IRS; simply filing an extension or finding that you owe the IRS a chunk of money come tax time shouldn’t affect your credit reports. It’s only when you don’t have the money to pay what you owe that it can affect your credit. However, if you don’t work out a solution and your debt remains unpaid, the IRS can choose to file a federal tax lien in court to try to ensure repayment. In order for this to happen, your debt generally has to exceed a certain threshold—right now that’s $10,000
- Beware of identity theft as well, because that can affect your credit too If you file your tax return expecting a refund, but are told by the IRS that your refund has already been issued, you may discover that you are a victim of tax-related identity theft. It’s a problem that’s expected to reach $21 billion during the next five years and the IRS is not doing a lot at this point to protect taxpayers. While the fact that you have been a victim of this type of fraud won’t automatically affect your credit reports, you’ll probably want to place a fraud alert or credit freeze on your credit reports. And that will make applying for credit or other services such as a cell phone, utilities or insurance, that much more of a hassle.
- Removing a tax lien affects your credit Tax liens are considered very negative a tax lien will stay on your credit until it’s paid in full generally can’t be discharged in bankruptcy Effect on your credit score depends on how old the lien is The longer you let past years taxes sit unpaid, the harder it will hit the rest of your life Until recently, tax liens remained on credit reports for seven years from the date they were paid or satisfied. But under the IRS Fresh Start program announced in early 2011, you can request that the IRS withdraw the lien if you have paid or satisfied the tax debt. This is not something that happens automatically. You must ask. Keep in mind the sooner you pay your past tax, the sooner it can stop affecting your life fill out Form 12277 requesting that the lien be withdrawn Patience; extremely time-consuming process If it is withdrawn, the IRS will file the notice of withdrawal with the office where it was recorded and send you a copy
- You can also request, in writing, that the IRS notify credit reporting agencies, creditors or financial institutions. It’s up to you to provide the addresses for those parties you want notified of the withdrawal. Also make request for removal to credit bureau But don’t be so sure that just because a tax lien no longer shows up on your credit report that it has disappeared altogether The lien wasn’t on the credit reports, but it showed up in the property records as a lien against the property The homeowner was required to either show proof it had been satisfied or pay it off before the new loan could be completed