Tax season is here, and most of us are still scrambling to complete the paperwork, all while either dreading the fact that we owe money or celebrating an upcoming check. But how you view tax season might be much different when you are also carrying considerable debt. After all, there is less room for error when you are in that type of situation and the outcome of owing money or choosing how you spend a refund is extremely important. There are also a few unique situations that could affect you, and you need to know the details involved. So here’s a look at five things you need to know this tax season if you are also balancing debt.
Your Refund Could Be Intercepted
If you owe debts to federal or state government agencies, all or part of your tax refund can be intercepted. A few examples of when this might happen include:
- You still owe money to the IRS from a previous tax year
- You are behind on child support
- You are in default on federal student loan payments
Keep in mind that once you deposit your refund into your bank account, other agencies and third parties may be able to garnish it from there, depending on the laws of your state.
You Can’t Afford to Be Late
Don’t be late filing your taxes. If you owe the IRS, the fees will add up quickly after April 15. You will pay a five percent penalty each month that you are late, up to a maximum of 25 percent.
If you owe but can’t make the payment, your better option will be to at least go ahead and file the taxes on time. That way, you will just be charged a penalty of .5 percent each month that you are late, up to a maximum of 25 percent.
If you’re really in a bind, you will want to file an extension, which also helps minimize fees.
Are you getting a refund instead?
While it might seem like you can be in less of a rush to get your money back (since there’s no penalty for being late in this case), it’s still important to act quickly. The reason is that if you are in debt, you are losing money each month in the form of interest and your refund can help stop the bleeding (see point #5 below for more info).
Your Forgiven Debt Might Be Taxable
Cancelled or forgiven debts worth $600 or more are treated as taxable income by the IRS. This is one of the many drawbacks to debt settlement. You’ll know you owe when you receive a form 1099-C in the mail.
Then Again, It Might Not Be
If you’ve really struggled financially, to the point that your total liabilities exceed your total assets, then your forgiven debt might not be taxed. This is called the “insolvency exclusion. Read more about this from the IRS.
For more help, check out this article about forgiven debts and taxes from CreditCards.com
Your Refund Should Be Used Efficiently
If you’re in debt and getting a refund, regardless of size, you should view it as an opportunity to improve your financial stability. To achieve maximum efficiency, you should put it toward your account with the highest interest rate, but if you want to knock out a few smaller accounts at once, that’s a great idea, too.
Want Help with Your Budget?
If you want to improve your budget and develop a game plan to pay off your debt, we would be happy to help. Our counselors can help you spend your money more wisely and better manage your outstanding debts. You might even be able to secure lower interest rates on your credit cards, as a result of our Debt Management Program. Contact us today to get started.