Help! My Tax Refund Was Taken to Pay My Student Loan Debt

Help! My Tax Refund Was Taken to Pay My Old Student Loan Debt

Every year, many people file their taxes expecting a refund … only to discover the money’s been taken to pay off their student loan debt. The bad news: The government can take that money if your federal student loans are in default. The better news: You can contest the seizure. And, if it was taken in error, you should be able to get your refund back. If it wasn’t an error, well, it can be very, very difficult to get those dollars released. However, we have heard anecdotally from readers who contacted the Education Department, demonstrated hardship and had at least part of their refund returned. The process appears to take awhile — and, again, there’s no guarantee Uncle Sam will comply — but it is an option someone can pursue if money is particularly tight.

Now, let’s delve a little deeper into why refunds get withheld — and what you can do if yours was one of them. (Psst: We’ll also provide some tips of what to do about those delinquent student loans.)

Why Was My Tax Refund Taken?

If you are in default on your federal student loans (which by definition means you are behind by 270 days or more), the Education Department can take your tax refund using the Treasury Offset Program. This program authorizes federal payments such as tax refunds or Social Security income to be intercepted in whole or in part to pay debts owed to other federal agencies. There are some limited consumer protections, but debtors aren’t always aware of them.

What Can You Do if Your Refund Was Seized?

We spoke with Jay Fleischman, a student loan and bankruptcy attorney, about what people can do. First, he said that by federal law, people who have student loans in default get a notice that they are at risk of having any potential tax refund seized for student loan repayment. That notice contains instructions for a review of your loan information and how to avoid the offset —so, in other words, if your student loans are in default and tax season is coming up, be sure to watch your mail.

If your refund is taken and you don’t believe it should have been, you can contest the offset by contacting the Education Department. If it was taken in error, the money will be refunded. However, be aware that an error does not generally include not getting a notice; it typically would require that you be able to prove your student loan was not in default.

As we mentioned earlier, if you were in default, you probably can’t get your refund back. The one case in which you are likely to be able to recover the money is if you filed jointly with a spouse, and it was his or her student loan that was in default.

“You may be able to make an injured spouse claim,” said Fleischman.

How Can I Keep a Tax Refund From Being Taken for Student Loan Debt?

Fleischman said it’s a good idea to adjust your withholdings whether you’re subject to a tax refund offset of not. A large tax refund means you overpaid your taxes during the year, he notes. If you are in default on your federal student loans you probably need that money. But at this point, there is nothing you can do to change the over-withholding from last year. Still, revisiting how much you’re having withheld for taxes is a smart move for anyone who got a large refund.

The bigger problem is how you are going to deal with the default on your student loans from now on. You’ll want to get out of default and stay that way. (Here’s an explainer on how to deal with student loan default.) In some cases, you may be able to get an income-based repayment plan in which your monthly payment can be set as low as $0. And “if your circumstances are dire and expected to remain so,” bankruptcy and the discharge of student loans might be options, Fleischman said. (Yes, that can be done.)

For most, what is done is done. The best thing you can do is to look ahead. And if you haven’t filed your tax return and expect a large refund, you may want to see what options you have to get out of default first. Being in default on a student loan can not only squeeze your budget, it can hurt your credit and cost you thousands of dollars in higher debt costs over a lifetime. You can get two of your credit scores for free on Credit.com to track your standing.

Got a question about your student loans? We want to help. Ask away in the comments section below and one of our experts will try to get back to you. In the meantime, visit our student loan learning center for more info.  

This article has been updated. It originally ran on March 9, 2015.

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Why You Should Apply the 72-hour Rule to Your Tax Refund

Ka-ching! Your tax refund just hit your checking account. Time to apply the 72-hour rule.

Whether your refund is in the thousands or hundreds, the urge to spend the funds might instantly become overwhelming. Maybe you already had an idea of what you want to spend the money on and you’re all set to hand over your refund for it. Or, maybe the money means you finally have enough to make a large purchase you’d otherwise need to save for.

Whatever your reason, don’t spend your refund quite yet. If it’s not an immediate emergency (read: root canal, car accident, flood, etc.), let the cash burn a hole in your pocket for about 72 hours.

Journalist and money expert Carl Richards came up with the “72-hour rule” to kick his habit of buying every book he wanted on Amazon, ending up with a pile of unread books. Now, he says he lets a book sit in his shopping cart for at least 72 hours before hitting “buy,” and he’s saving money only buying books he will actually read. You can apply a similar practice to your spending habits.

Why wait 72 hours?

Our brains respond positively to instant gratification. It’s why so many of us find it difficult to save money or lose weight. We want the item or food now, and when there’s nothing stopping us, why wait?

You need the space between receiving the money and spending it to think. The shorter that space is, the less time you have to think and the more likely you are to spend the funds impulsively.

“People often look at their tax refund as found money like lottery winnings or inheritance. The temptation to spend surprise money on something fun or frivolous is strong,” says Denver, Colo.-based Certified Financial Planner Kristi Sullivan.

You want to avoid doing that. Your tax refund isn’t lottery winnings or an inheritance. It’s your hard-earned money being returned to you with no interest gained.

Tax refunds averaged $2,860 in 2016, according to the IRS. This year, a SunTrust survey found about 1 in 4 Americans already planned to spend their refund money on a large purchase before they even received the funds. That proportion rises to 36% among millennials and 40% among Gen-Xers, according to SunTrust.

That’s no bueno, considering the average citizen admits they can’t pull together $400 in case of an emergency.

Kinney says “hitting the pause button on spending impulses gives the rational brain time to think” of more practical ways to use the money like getting out of debt, contributing to a college savings fund, or adding to your savings.

Although he acknowledges when you’re living paycheck to paycheck, it’s a little harder to resist a sudden — albeit predictable — boost to this month’s budget.

“People feel constrained by their paycheck all through the year, then suddenly this windfall of money gives them the ability to splurge. The temptation can be hard to resist,” says Kinney.

Here are a few ways you can manage the temptation, and the time.

While you wait…

Weigh your wants vs. needs

The waiting period is supposed to help you to spend your tax refund responsibly, right? Consider all of the expenses the money could go toward. Should you buy the new iPad or pay off your credit card? How about that car loan? Time to weigh your options.

Sullivan says that means you should pit your “wants” against your “needs.”

“A need that you haven’t already bought is rare. Wants are everywhere. Time to reflect might have you making a more mature decision with your money,” says Sullivan.

Do some soul searching to see where your financial priorities lie. You might find your need to pay off your credit card this month to avoid paying more in interest outweighs how badly you want that new gadget. Think about it.

Review your finances

Since your tax refund might consume your every thought for three days, you might as well use the time to think about your overall financial picture.

“Sit down and think about other pressing financial issues, and how you plan on paying for them,” says David Frisch, a Melville, N.Y.-based financial planner. He suggests you review bank statements, brokerage accounts, long-term goals, and other financial considerations, then give some thought to whether or not you’re on track to achieve them.

For example, if you realize you don’t have enough in your emergency fund to cover three to six months of expenses, you might decide to put the money there instead of spending it. Or, if your refund could completely pay off a high-interest debt like a credit card, you might decide to free yourself from the debt burden.

Make sure you don’t get a huge refund every year

Most Americans receive a refund because the government withheld too much in taxes. The government uses information you gave them to decide how much of your paycheck to withhold each pay period.

“Changing your withholding will give you more of your money during the year so that you will not get a large refund that you might be tempted to spend frivolously,” says Alfred Giovetti, president of the National Society of Accountants.

You can change information on your withholding forms on your own if you’d like. Use this IRS calculator to determine your proper withholding and figure out what information you need to correct on your W-4 form. Then, contact your employer’s human resources department to turn in a new W-4 with the correct information.

If you’d rather have some assistance, you can contact a professional. Work with your accountant or financial adviser to change information on your W-4 and its equivalent withholding form for the state in which you reside.

“Plan with a good tax accountant to get a small refund or a small liability by changing your withholding, so that you do not rely on the refund as ‘mad money,’” says Giovetti.

Treat yourself

We admit, waiting sucks, but it doesn’t have to be complete torture. Sullivan suggests taking the edge off with a small reward for each day you wait.

“It could be an ice cream cone, a long phone chat with a friend, an hour reading a trashy novel, or whatever makes you happy,” she says.

Just make sure the reward you choose isn’t too expensive, and you should avoid getting into more debt. Your “reward” could serve as a break while you comb through your finances.

The takeaway

Take some time to think before spending whenever you receive unexpected income, and you might make better spending decisions. Maybe you need only 24 hours, instead of 72, or maybe you need a little longer to decide what to do with money, but the same lesson applies. If you’re considering a purchase that’s a “want” and not a “need,” think before you buy.

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Why It’s Not Smart to Get a Big Tax Refund Each Year

Why let the government hold your money throughout the year when you can put that money to work today?

If you’re expecting a big tax refund this year, you’ve probably already decided what you’re going to do with that money. Whether it’s a vacation, a new jet ski or a nice boost to your retirement savings, you’re probably pretty excited about the extra cash. But here’s the deal: Getting a big tax refund each year isn’t necessarily a good thing. It means you haven’t been putting that money to work for you all year long.

“If you are receiving a refund this year, it means that you overpaid your taxes during the course of the year. Instead of giving the government your hard-earned money, think about all of the great things you could have done with that money,” says Ron Weber, a senior marketing manager with Quicken Inc. “You could have paid off credit accounts, invested it in your future, and/or spent it as you earned it. Money is always better in your pocket than in someone else’s — even if that someone else is the government.”

Here’s how you can make sure you boost your bottom line this year by not overpaying your taxes and also not getting a refund.

Review Your Withholdings

Sit down and review your paycheck withholdings and see if you can break even when it comes to the taxes you pay. You’re looking for your Goldilocks zone. Not too little, not too much, but just right.

“If you are unsure what to do, experiment until you get it right,” Weber advises. “Most people are unaware that you can change your number of payroll exemptions as many times as you wish.”

You can also try using a tool to help you find your Goldilocks zone. The Internal Revenue Service has a withholdings calculator that can help you see how much difference a change in your withholdings will make. Certainly, you don’t want to owe taxes next year if you can avoid it, but getting your tax refund as close to zero as possible means you can invest or spend the additional income on a regular basis instead of letting the Treasury Department store it for you.

As you review your withholdings, you’ll want to be sure you …

Don’t Forget Your House …

If you own your own home, you probably know you can claim mortgage interest and property tax deductions, so take into account how much that will reduce your tax burden.

… Or Your Investments

If you own investment property, you’ll also want to consider any expenses you can deduct that might affect your taxes for next year.

… Or Big Life Events

“There are certain life events that you want to keep in mind when changing your exemptions such as marriage, having children or any situation where you decrease the number of dependents, such as divorce,” Weber says. “Also, keep in mind that while you are able to change the number of withholdings as often as you wish, your employer doesn’t have to apply it until the first payroll ending 30 days after you submit the change, effectively limiting the number of times you actually can change. Other than these considerations, the ultimate goal each year is to get your refund close to zero. Make it a game and see how close you can come.”

But You’re Terrible at Saving Money, You Say?

Of course, if saving isn’t your forte and you’re going to just end up spending whatever additional income you get throughout the year, letting Uncle Sam hold it for you might not be such a bad idea if you plan to put your refund directly into a retirement account like an IRA. The IRS will even help you keep your promise to invest the money by direct depositing all or part of your refund into savings, an IRA or even toward buying savings bonds.

If that’s your situation, you can read our guide on how to maximize your tax refund. But investing that money into a 401K throughout the year could be a better alternative, especially if your employer provides matching funds.

Those savings can pile up, especially if you start young. If you’re planning to turn your refund into the start of a lifetime of saving, check out our list of 50 things young people can do to make sure they’re set when it’s time to retire.

Also remember that keeping your credit in good standing helps you save money throughout the year, on everything from loan and credit card interest rates to mortgages. A good way to check on how your credit is faring is by getting credit your two free credit scores, updated every 14 days, on Credit.com.

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How Your Tax Refund Can Help Your Score Better Credit

Use your tax refund the right way and it could help build your credit.

If you’re getting a tax refund this year, you’ve got three major options when it comes to using the money: You can save it. You can invest it. Or you can splurge. But break things down a little further, and that check (back) from Uncle Sam can help you build credit, too. For serious.

Here are six ways your tax refund could help you build — or even establish — your credit scores.

1. Pay Down Credit Card Balances

Second rule of credit scores: Keep your debt level below at least 30% (and ideally 10%) of your total available credit. Anything beyond that is bad for your credit utilization ratio. If you’re over that limit or, worse yet, bumping up against your limits, putting your tax refund toward your credit card balances can help improve your credit score. Better yet …

2. Pay Off High-Interest Credit Card Debt

Because those balances are going to spike pretty fast. Plus, you’ll be saving money in the long run. Good rule of thumb when it comes to dealing with multiple credit card balances: Make all your minimums, but put more money toward either the smallest (because motivation) or the one with the highest annual percentage rate (because, like we said, it’ll cost you less). You can see how your credit card use is affecting your credit by viewing two of your scores, updated every 14 days, on Credit.com.

3. Get a Secured Credit Card …

If you’ve got thin-to-no credit, consider using your tax refund to open a secured credit card. Secured credit cards are easier to get than other types of credit cards because they require the cardholder put down a deposit (usually $200 to $300) that serves as the credit line. (Or vice versa. That’s a little bit of a chicken-or-the-egg thing.) In any event, if you’re close to cash-strapped, you can use your tax refund to open the card. That line of credit will help you establish a payment history, the most important factor among credit scores — so long as you pay your charges off by their due date, of course.

4 … Or a Credit-Builder Loan

Credit-builder loans, available at your local bank or credit union, are essentially the installment loan version of a secured credit card. You “borrow” money (that’s where you tax refund comes in), which gets put in a savings account, then you make a series of monthly payments and get access to the money once the “loan” is paid in full. Credit-builder loans usually involve paying some interest on the money you’re borrowing/depositing, but they basically provide people who otherwise don’t have credit with the opportunity to build some.

5. Pay Off That Collections Account

OK, here’s the thing: Paying a collection account probably won’t get that item off of your credit report. Legally, it can stay there for seven years plus 180 days from the date of the delinquency that immediately preceded collection activity (more on how long other stuff stays on your credit report right here). And there’s no guarantee it’ll boost your score once it’s paid off.

Still, most credit scoring models treat paid collections differently than unpaid ones (they tend to carry less weight) and the newest scores actually ignore paid collections entirely. Plus, some collectors are changing their tune when it comes to pay for removal deals and immediately reporting the account to the credit bureaus.

Quick side note: We’re talking about legitimate collection accounts here, so if a collector comes calling, be sure to verify the account belongs to you. There are debt collection scammers out there and it’s not unheard of for a legitimate collector to get the wrong guy. Under federal law, collectors are required to send written verification of a debt to a debtor five days after first contact, so that slip of paper should give you an idea of whether you’re liable for the payment.

6. Start an Emergency Fund

Yeah, we know, money in a savings account isn’t going to do anything for your credit score … right now. But socking away some dollars for a rainy day can keep you from going to the old credit card when one comes. And that’ll keep your credit utilization on the right side of 30%. Plus, you’ll skip the interest. If you’re not carrying any debt and your credit is in OK shape, consider putting Uncle Sam’s check in a high or at least higher-yield savings account. Your credit score may thank you down the line.

Not getting a tax refund this year? No worries, we’ve got more ways you can fix your credit here.

Got more questions about building credit? Ask away in the comments section and one of our experts will try to help!

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How to Spend (or Invest) Your Tax Return

Expecting a hefty check from Uncle Sam? Here's how to spend your tax refund.

If you’re expecting a hefty refund this year from Uncle Sam, you may be tempted to spend it all on something extravagant for yourself. But it’s important to resist temptation and use that money wisely — at least most of it.

Your tax refund may feel like a windfall, but you should treat this surplus cash just like your other earnings, says David Weliver, personal finance expert and founding editor of Money Under 30.

It’s all about your attitude and making sure you set realistic expectations.

“The biggest mistake I see people make … is treating [bonuses and tax refunds] as ‘found’ money instead of earned money. Research shows we’re more likely to spend a windfall frivolously than money we’ve earned. This is especially true of money we weren’t expecting,” he says.

While tax refunds are still earned money, “the fact that it comes all at once means we associate it less with our daily efforts,” says Weliver. If your refund is what you’ve expected, or even bigger than you expected, you could be triggered to spend more of it. It’s probably not a good idea to count on having a sizable refund every year, “because that can lead to spending it before you’ve received it,” he says.

What’s the Best Use of My Tax Refund?

Before you spend anything, first you need to take stock of your debt situation. If you have credit card or consumer debt, attack that first. That’ll help your bank account — and your credit score, since high credit card balances can affect your credit-to-debt ratio. (You can see how yours is doing by viewing your free credit report summary, along with two free credit scores updated every 14 days, on Credit.com.)

“Pay it off, or at least as much of it as you can. That’s true of any debt with double-digit interest rates,” Weliver says. (You can find more tips for paying off your credit card debt here.)

When it comes to paying down larger debts, like student loans or a mortgage, the decision is more personal, and could be a good move as long as your other long-term financial goals are being met.

Should I Invest my Tax Return? 

 

After addressing any applicable debts, make sure you have an emergency fund that will cover at least six months of expenses. That money, along with anything that will be going toward big purchases in the next three years, like a car, the down payment on a home, or a big vacation, should be kept in a savings account.

“It can be tempting to invest that money in a rising stock market, but if there’s a big market correction before you cash out, you could be forced to sell at a substantial loss,” Weliver says. “If, however, you’ve got the emergency fund and won’t need that cash in the next few years, you’ll want to invest in boring old index funds or with a robo-adviser. Invest it, forget it’s there, and go back to working hard.”

You can also make contributions to a Roth IRA or a 529 savings plan.

At the end of the day, your tax refund shouldn’t turn you into a Grinch (unless you’re digging out of credit card debt), and spending some on a splurge could be good for you.

Setting aside between 10% and 25% of your tax refund for something you really want is a great way to reward yourself and stay motivated, Weliver says.

Another option? Get involved with causes you’re passionate about and donate some of your refund to charity. There’s a bit of a bonus to that option, too: The donation could net you a tax deduction next year.

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Help! The Government Took My Tax Refund to Pay Student Loans

If you’re still waiting for your tax refund but are far behind on your student loan repayments, you might want to rethink any big plans you had for spending your refund. That’s because there’s a good chance the government is going to apply that refund to your outstanding payments instead of sending it to you.

If you are in default on your federal student loans (late on your payments by 270 days or more), the Department of Education can take your tax refund using the Treasury Offset Program. This program authorizes the interception of federal payments — such as tax refunds or Social Security income — in whole or in part to pay debts owed to other federal agencies. There are some limited consumer protections, but debtors aren’t always aware of them.

Here are several things to keep in mind.

1. Heed the Notice

First, people who have student loans in default get a notice warning them in advance that they are at risk of having any potential tax refund seized for student loan repayment, Jay Fleischman, a student loan and bankruptcy attorney, told Credit.com in 2015. That notice contains instructions for a review of your loan information and how to avoid the offset.

2. Request a Hearing

If your refund is taken, you can still request a hearing. If it was taken in error, the money will be refunded. However, be aware what constitutes as an error does not generally include your not having received a notice. A successful hearing on your behalf would typically require you be able to prove your student loan was not in default.

The one case in which you are likely to be able to recover the money is if you filed jointly with a spouse, and it was his or her student loan that was in default. “You may be able to make an injured spouse claim,” said Fleischman.

3. Review Your Withholdings

It’s also a good idea to adjust your withholdings whether you’re subject to a tax refund offset or not, because a large tax refund means you overpaid your taxes during the year. If you are in default on your federal student loans, you probably need that money. But at this point, there is nothing you can do to change the overwithholding from last year. Still, revisiting how much you’re having withheld for taxes is a smart move for anyone who got a large refund.

4. Get Back on Track

The bigger problem is how you are going to deal with the default on your student loans from now on. You’ll want to get out of default and keep it that way. Fortunately, there are many payment options; you should be able to make one work for you. In some cases, income-based repayment payments can be set as low as $0. It might also be worth looking at whether you qualify to have some or all of your student loans forgiven.

There are some options for people who are behind on payments to get back on track, though, even if forgiveness isn’t an option. To get out of default, you can combine eligible loans with a federal Direct Consolidation Loan or visit the government’s default rehabilitation program. If you make nine consecutive on-time payments (the payments can be extremely low), your account goes back into good standing, and the default is removed from your credit report.

Defaulting on a loan seriously damages your credit score, and because student loans are rarely discharged in bankruptcy, the debt can beat down on you for decades. (You can see how your student loans are currently impacting your credit scores for free on Credit.com.)

More on Student Loans:

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5 Things You Can Do Now to Get a Tax Refund Next Year

woman_with_tax_refund

If you aren’t getting a tax refund this year, it might be a good idea to sit down now and figure out what adjustments you can make to ensure you do get one next year. Here are five things you can consider to help make that happen.

1. Adjust Your Withholdings

If you’re truly looking to get a payout come April, you may want to adjust your withholdings with your employer so you pay more taxes over the course of the year. Or, instead of giving the government a free loan, sit down and review your withholdings and see if you can break even. You can invest that money regularly and actually make a small percentage on what Uncle Sam would’ve held for you over the year. On the flip side, if you are getting a really big payout, here are some ways you can reduce your tax refund so you pocket more of your own money throughout the year.

2. Buy a Home

Owning your own home allows you to claim mortgage interest and property tax deductions, which can definitely decrease the amount you owe come tax time. If you do buy, don’t forget that any points you paid are deductible for that year.

3. Do Some Spring Cleaning

If you have a lot of things around the house you aren’t using or no longer want, you can donate them for a nice tax deduction. Household goods, clothes and other items can all be claimed. There are tools online that can help you figure out what a reasonable fair market value for those donations might be.

4. Start Investing

If your company offers a 401K and you aren’t already investing in it, know that you’re not only missing out on whatever matching funds they offer, you’re also passing up some tax advantages. Similar tax advantages also come with investing in IRAs and employee stock purchase plans.

5. Document Your Job Hunt

Did you take a new job, or are you currently looking for one? You may be able to deduct the costs to get your resume in shape, any fees paid to employment agencies or career counselors and even the cost of any travel you might’ve done during the search as a miscellaneous deduction. Just don’t forget the job must be in your current line of work and only the amount of your miscellaneous deduction that exceeds 2% of your adjustable gross income is deductible.

For more tips, read our guide on how to maximize your tax refund. And remember that keeping your credit in good standing helps you save money throughout the year, on everything from loan and credit card interest rates to mortgages. A good way to know how your credit is faring is by checking your credit scores for free each month on Credit.com and by getting your free annual credit report.

More Money-Saving Reads:

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What Happens If You Get a Tax Form After You File?

Whether you’re dropping off the paperwork at a post office or clicking a submit button online, the feeling of filing your taxes is right up there with the sense of relief you feel at the end of the last work day before a vacation. Ah, freedom. It’s temporary, but it’s nice.

And as unwelcome as it would be for your boss to call you while you’re enjoying time off, so is receiving an envelope or email marked “IMPORTANT TAX DOCUMENT ENCLOSED” after you’ve filed your taxes.

It’s actually not that big of a deal (the tax thing, not the overbearing boss). Depending on the form you received, you may have to file an amended return. Form 1040X can be used to amend a return if you need to change your filing status, income, deductions or credits on your original return. Unfortunately, if you’re someone who favors e-filing, you can’t do that with an amended return. You can get form 1040X on the Internal Revenue Service’s website, as well as instructions on where to send the paperwork.

Keep in mind that updating your federal tax return may mean you need to adjust what you sent to your state, so the IRS recommends contacting your state tax agency for guidance on that. Another side effect of amended returns: delays. Don’t expect a prompt refund (if you’re getting one). “[A]mended returns take up to 16 weeks to process and up to three weeks from the date of mailing to show up in our system,” the IRS website says.

It’s frustrating to have to update your taxes after you’ve filed them, but as far as tax problems go, it’s an easy one to fix. Ideally, you won’t have to amend your return, because you’ve either diligently collected all your paperwork before filing or the left-out form doesn’t affect your return. (For example, the 1095-B or 1095-C, new forms for tax year 2015, aren’t required to file your taxes.)

Whatever you do, don’t forget to file just because you’re waiting around for a form. Be diligent about following up with employers about any income forms you may need and you won’t miss the April 15 deadline. Otherwise you can face the consequences, which include a damaged credit score if things get so bad that you get a tax lien. (You can check your credit scores for free on Credit.com to see if there are any lingering tax issues currently impacting your credit.)

More on Income Tax:

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Are You Missing Out on This Tax Break?

savers_credit

Are you or someone you know overlooking one of Uncle Sam’s most generous tax breaks? The Saver’s Credit allows low- to moderate-income workers who are saving for retirement to reduce their federal tax bill by as much as $1,000 ($2,000 for married couples filing jointly). But just 25% of workers with annual household incomes of less than $50,000 are aware of the credit, according to a new Transamerica Retirement Survey.

“Unfortunately, many eligible workers may be missing out on the Saver’s Credit simply because they don’t know that it exists,” Catherine Collinson, president of the nonprofit Transamerica Center for Retirement Studies said in a news release on the survey.

The Saver’s Credit — also called the Retirement Savings Contribution Credit — may be applied to the first $2,000 in voluntary contributions an eligible worker makes to an IRA or an employer-sponsored retirement plan such as a 401(k) or 403(b). It’s easy to see why taxpayers might miss this credit. Because contributions in employer-sponsored retirement plans and IRAs grow tax free, workers often confuse the two benefits or figure the government wouldn’t offer two tax benefits for the same savings. But the credit is an important incentive for these workers to save for retirement, according to Collinson.

Here’s who’s eligible for the Saver’s Credit for the 2015 tax year.

  • Single filers with adjusted gross income (AGI) of up to $30,500
  • Head of households with AGI up to $45,750
  • Married couples filing a joint return with AGI up to $61,000

Eligible taxpayers must file a 1040, 1040A or 1040NR. The credit is not allowed on the 1040EZ.

However, whether or not you are eligible for the Saver’s Credit, contributing to your employer-sponsored retirement account or a traditional IRA can be one of the best ways to maximize your tax refund. The reason? Your contributions are made with pre-tax dollars, which helps lower your taxable income – and build savings for the future. Knowing the basics of common tax exemptions and deductions can also help. You can find more information on the Saver’s Credit on the Transamerica Center for Retirement Studies website or on www.IRS.gov.

Remember, filing your taxes early can minimize the odds of falling victim to taxpayer identity theft. And, if you are a victim of tax refund fraud and believe your Social Security number was compromised, you should keep an eye on your credit for signs of other types of identity theft. You can do so by pulling your credit reports for free each year at AnnualCreditReport.com and viewing your credit scores for free each month on Credit.com.

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9 Tax Nightmares

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