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4 Ways Taxes Can Impact Your Credit

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credit cardsBy Mandi Woodruff


Since credit debt isn't exactly considered an income-booster, it's no wonder so many consumers forget how closely credit and taxes are intertwined.

Just ask the Citibank credit card customers who were stunned when the company suddenly decided to tax their frequent flier rewards, or the 6.4 million taxpayers estimated to pay taxes on relieved debt in 2012.

For insight into the little-known ways taxes and credit go hand in hand, we tapped Ken Lin, CEO of CreditKarma.com. Here are four examples:

Paying your tax bill late could damage your score
Just like your electricity and cable bills, falling behind on your tax payments could drag your credit score down. That's because the government could file a tax lien against you for taking too long to pay your bill. Since a lien is public record, it goes straight to credit reporting agencies and could stay on your credit report for as many as seven years, Lin warns. If your bill's too much to handle, be proactive and work out a repayment plan with the IRS instead.

Think twice before you pay taxes with your credit card
"When facing a hefty tax bill, many Americans might be tempted to pay their taxes with a credit card, if only to earn the reward points," Lin says. But before you fork over that plastic, keep in mind that the IRS will charge a processing fee of anywhere from 1.89% to 2.49% of the payment. "That means if you owe $10,000 in taxes, paying it on a credit card would cost you an additional $249 – well above the probable value of the credit card rewards earned," he notes.

Your credit card reward point "gifts" may be taxable
Back to those grumpy Citibank customers: Keep in mind that some of those sweet sign-up bonuses and rewards credit card companies have been using to bait new customers may be taxable. It all depends on how they were earned, Lin says. "Traditional rewards that are accumulated because of purchases made with credit cards are tax-exempt, but rewards that are not tied to purchases, like cash or miles bonuses for opening a new account, are taxable as the IRS views them as 'taxable property windfalls.'"

You'll pay taxes on your relieved debt
You might thank your lucky stars if a credit company decides to write off your debt, but remember that the IRS will consider that taxable income. "It's the same way with debt settlement," Lin says. "The remainder of the debt that you settled is subject to taxation." Keep an eye out for a 1099-C form if any debt was forgiven during the 2011 tax year.

More from Business Insider
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What Are the Tax Penalties for Smokers?

Starting in 2014, the Individual Shared Responsibility provision of the Affordable Care Act made you responsible for having minimum essential coverage, or MEC, in health insurance. Otherwise, you need to be eligible for a health care exemption, or you could pay a penalty when filing your income tax return. This requirement for minimum essential coverage applies to smokers and nonsmokers alike. If you're not covered by an employer's health plan and are a smoker, you can go to the health care marketplace to find MEC. If you're still unable to comply, you may have a penalty applied.

5 Steps to Navigate the Healthcare Marketplaces

To navigate the Health Insurance Marketplace, you have to know what you want from a health plan. Have your previous plan handy to make comparisons, as well as household and income information. If this is your first health plan, be aware of your needs and know your tax situation. Eligibility depends on the size of your family and combined income from all sources.

What Is Form 8941: Credit for Small Employer Health Insurance Premiums

Small business owners who subsidize the cost of employee health insurance premiums may be able to get some of that money back by claiming the credit for small employer health insurance premiums on their taxes. Some of the eligibility requirements, however, limit the number of people a business can employ and the average annual wages they earn. Qualifying as a small employer can reduce your tax bill by the amount of the credit you report on Form 8941.

What Is Form 8911: Alternative Fuel Vehicle Refueling Property Credit

In light of rising gasoline prices and environmental concerns, consumers have become more receptive to buying cars and trucks that run on types of fuel other than gasoline. The U.S. government introduced a tax incentive to encourage the installation of facilities to store or dispense alternative fuels in 1992. That incentive has evolved into a tax credit that also applies to equipment that recharges electric cars. If you equipped your home or business to accommodate alternative fuel vehicles, you may be able to use Form 8911: Alternative Fuel Vehicle Refueling Property Credit to reduce your federal tax obligation.

What Is Form 8885: Health Coverage Tax Credit

The health coverage tax credit is a program in place for tax years from 2002 to 2013 to help eligible individuals and families by paying a portion of premiums for qualified health insurance programs. Since the legislation authorizing the credit expired in January 2014, tax returns filed in 2014 for the 2013 tax year represent the last time eligible taxpayers can claim the credit.

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AL CONFER

Let\'s see! The rich get to keep their money in offshore accounts, not subject to taxation and us mere mortals get the living hell taxed out of us. Nothing ever changes does it?

February 19 2013 at 11:13 AM Report abuse rate up rate down Reply
micsky5

yeah>>>>>>>>>>>>>>>i bet<<<<<<<<<<<<<

February 18 2013 at 6:03 PM Report abuse rate up rate down Reply
jcm024

and dont forget the company paid portion of your health care...............its now Taxable too.
Now thats change we can believe in......

February 18 2013 at 5:03 PM Report abuse rate up rate down Reply
malcolm

So I guess my rewards points on my credit card will be taxed soon. I made $765 using my credit card in 2011, I haven't added up my 2012 rewards yet. Oh great, I never have an outstanding debt but use my card for everything since it builds up cash so now I'll be penalized.

February 18 2013 at 4:25 PM Report abuse rate up rate down Reply
jdykbpl45

Obama wants it all!

February 18 2013 at 12:59 PM Report abuse +2 rate up rate down Reply