- Days left

4 Ways Taxes Can Impact Your Credit

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
A New Legal Interpretation May Require You to Pay Taxes on Frequent Flier Miles
Tax Filing Tips for First Timers That Won't Freak You Out
How America's Credit Reporting System Gets Away With 40 Million Mistakes

Increase your money and finance knowledge from home

Basics Of The Stock Market

Stock Market 101 - everything you need to know but were afraid to ask!

View Course »

Managing your Portfolio

Keeping your portfolio and financial life fit!

View Course »

TurboTax Articles

Cities with the Lowest Tax Rates

The total amount of tax you pay reaches far beyond what you owe the federal government. Depending on where you live, most likely you're required to pay additional taxes, including property and sales tax. The disparity between the amount of tax you pay in a low-tax city and that in a high-tax city can be dramatic. Living in any of these 10 cities could save you a bundle, although the exact amount may fluctuate based on your income and lifestyle choices.

Cities with the Highest Tax Rates

Much ado is made in the press about federal tax brackets, but cities can carry a tax bite of their own. Even if you live in a state that has no income tax, your city may levy a variety of taxes that could eat away the entire benefit of living in an income tax-free state, including property taxes, sales taxes and auto taxes. Consider all the costs before you move to one of these cities, and understand that rates may change based on your family's income level.

Great Ways to Get Charitable Tax Deductions

Generally, when you give money to a charity, you can use the amount of that donation as a deduction on your tax return. However, not all charities qualify as tax-deductible organizations. While there are many types of charities, they must all meet certain criteria to be classified by the IRS as tax-deductible organizations. There are legitimate tax-deductible organizations in many popular categories, such as those listed below.

A Freelancer's Guide to Taxes

Freelancing certainly has its benefits, but it can result in a few complications come tax time. The Internal Revenue Service considers freelancers to be self-employed, so if you earn income as a freelancer you must file your taxes as a business owner. While you can take additional deductions if you are self-employed, you'll also face additional taxes in the form of the self-employment tax. Here are things to consider as a freelancer when filing your taxes.

Tax Deductions for Voluntary Interest Payments on Student Loans

Most taxpayers who pay interest on student loans can take a tax deduction for the expense ? and you can do this regardless of whether you itemize tax deductions on your return. The rules for claiming the deduction are the same whether the interest payments were required or voluntary.

Add a Comment

*0 / 3000 Character Maximum


Filter by:

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

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

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

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

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

Obama wants it all!

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