Tips for Filing Taxes While in Debt

Published March 2021
Image of form 1040 Individual tax return

Disclaimer: ClearOne Advantage does not offer tax advice. Please consult with your accountant or tax professional for advice regarding your specific tax situation.

If you are in the process of paying down your debt, there are certain things to keep in mind at tax time. Here are some tips for filing taxes.


Key Points
  • If you are receiving a federal tax refund for 2020, use it wisely by saving, paying down debt or both.
  • Your existing debt may provide additional deductions—consult with a tax professional to learn which deductions you qualify for.
  • If you are expecting to owe the IRS taxes, you still may have options despite your existing debt.

The IRS provides free tax programs for those who qualify to file their federal taxes for free. If you’re in debt already, it may be beneficial to use one of these programs to cut back on your spending. Even a little bit of extra money at the end of the month can help you pay off debt or even pay taxes you owe the IRS if you’re not getting a refund on your federal taxes.

Are You Getting a Refund?

Getting a tax refund while in debt can be an amazing feeling, but don’t let it go to your head. Read on for our tips to make the most of your refund.

  • Maximize your return by taking advantage of all tax deductions you are eligible for. This may include deductions based on your debt. If you are unsure which deductions you qualify for, consult a tax professional or accountant. Ask about deductions for:
    • Student loan debt—you may be able to write off the interest you paid toward your student loans in 2020.
    • Debt payment deductions
  • In most cases, the IRS considers cancelled debt to be income, so it is taxable. You should have received Form 1099-C from your debt settlement company to report the cancelled debt on your taxes.
  • Even though the IRS pushed back Tax Day until May 17, you should still file your taxes as soon as you are able. The sooner you get your refund, the sooner you can put it to good use!
  • Use your refund wisely by adding to your emergency fund if needed or to pay off your debt. Contributing your refund to your emergency fund may help you to avoid debt, before or after you’ve paid off your current debt. If possible, you can also split your refund between savings and debt payments.
  • Don’t think of your tax refund as “free money”—it’s money you earned that the government owes to you. A shopping spree could even increase your credit card debt if it gets too out of control and you end up spending more than your refund.

Expecting to Owe Taxes?

If you owe the IRS money, don’t panic. Read on to learn ways you may be able to handle your 2020 tax bill, even with existing debt.

  • File on time to avoid any late fees, penalties and interest that could increase your tax bill.
  • If you are unable to pay your tax bill for 2020, look into payment plans that the IRS offers to those who cannot afford to pay their tax bills in full. These programs can help you pay off your tax debt while continuing to pay off your existing debt.
  • If you consistently owe taxes each year, it might be time to consider decreasing the number of exemptions you claim to increase the tax taken out of your paycheck. This will reduce your tax bill for next year’s return, so you won’t be surprised. Consult with your tax professional for what may be the best option for you.
  • Don’t forget about state and local tax breaks that could lower your overall tax bill or even potentially provide a refund at the state level that you can use to pay for your federal taxes. Even though the IRS may take the taxes you owe immediately, you may have the security of knowing you’ll get that money back after you file your state or local taxes.
  • Consider using all or part of your third stimulus check to go toward the taxes you owe. Even paying just a portion of your tax bill can save you on future fees and interest.
  • Make sure you are getting all of the deductions you qualify for if you are expecting to owe taxes. Even a small deduction could help you lower your federal tax bill, leaving more funds to continue paying off your existing debt.

Although ClearOne Advantage can’t help with your tax debt, we can help you resolve your credit card debt to potentially make it easier to handle your tax debt. Contact one of our Certified Debt Specialists at 866-481-1597 to discuss your best debt relief options and get a free savings estimate.

 

feel free from debt-1

 

Topics: Financial Education