What is Wage Garnishment?
A creditor can garnish wages for numerous reasons. But typically, consumer debt, child support and alimony, and student loans are the most common sources. When a court decides to garnish your earnings, they will mandate that a portion of your income will be used to resolve your debt.
Many individuals do not realize they have rights when it comes to wage garnishments, however, including steps they can take to lessen the effect of these garnishments, caps on how much money can be taken at once, and ways that can help them bounce back.
For many people, January 1st signals the start of the season in which they can get a big payout from the government in the form of a tax return. But for those who’ve failed to file their taxes in the past or those who know they’ll owe the IRS a large sum of money, January 1st triggers an overall feeling of dread that increases until April 15th.
Can the IRS garnish wages? If you’re asking this questions, you’ve likely gotten a not so friendly letter from the IRS saying you owe them some money. If you’re in hot water with the IRS, you’ve come to the right place.
Read on to learn when, how, and why the IRS garnishes wages.
Why Does the IRS Garnish Wages?
In short, the IRS garnishes wages when taxpayers have not paid the IRS the money they owe and they do it because they have the power to do it.
That doesn’t mean that when April 15th rolls around and you haven’t paid the IRS what you owe, that they will automatically start garnishing your wages. Wage garnishment is typically a last resort by the IRS enacted on a head of household after a significant amount of time has been spent trying to get you to pay what you owe.
When Will the IRS Start Garnishing Wages?
The good news about IRS wage garnishment is that the IRS must give you plenty of notice before they garnish your wages.
The first step of the process is when the IRS sends you a notice. This notice gives you important information about the amount of money you owe them, including all taxes, penalties, and interest that has accrued. The letter specifies a date in which you must pay the amount you owe.
What’s the Process for the IRS to Garnish Wages?
If you don’t pay your taxes by the due date listed in the first letter, you will get a notice called a “Final Notice of Intent to Levy.” This is an official notice of your right to pay before any potential actions are taken against you. You have 30 days from the receipt of this letter pay your taxes before the IRS can place a wage levy on you and begin the garnishment process.
You can stop the garnishment process if you contact the IRS and agree to an approved installment agreement to pay your tax debt. As long as you continue to make all your payments on your payment plan, you’ll be safe from IRS wage garnishments.
How Much of My Income Can the IRS Garnish?
You know the IRS can garnish your wages, but they can also garnish things like bonuses, commissions, retirement, and even your pension. Unlike other creditors, the IRS is not restricted to wage garnishments of 25 percent of your total income.
Instead, the IRS has a specific formula to determine how much money you need to live on, and then they garnish the rest of you (or the head of household’s) wages. This is based upon a standard deduction and the number of dependents you claim on your taxes. The IRS does not take into consideration your actual expenses when calculating how much or your salary to take in wage garnishments.
Have a second job? The IRS is allowed to garnish 100 percent of your wages from your second job that doesn’t cover your living expenses and they can take the entirety of any bonus you receive up to the amount you owe in back taxes.
What Money Can the IRS Not Touch?
There are a few items that the IRS cannot take;
- Tax-free interest is one source of income that is excluded from taxes. This is income earned from a political entity entitled to freedom from federal taxes, like income earned from state-issued bonds and other instruments. Municipal bonds are investment instruments that offer a tax benefit, and their value goes up when your marginal tax rate increases.
- You can also exclude your car pool earnings without IRS issues. You cannot be taxed on income made from a carpool.
- If you sell your house, you can exclude up to $250,000 in profits, $500,000 if you file a joint return with your spouse. Every two years, you can claim this exclusion. If you sell your house after less than two years, you can also claim a partial exclusion.
How Can I Protect My Assets from the IRS?
The best way to prevent wage garnishment is to pay the IRS what you owe. This may seem like a simple explanation, but, in reality, it’s the only way to prevent the IRS from garnishing your wages or levying your assets.
Another option is to file bankruptcy. Filing bankruptcy automatically stays all collection and wage garnishment actions from creditors, including the IRS. Filing bankruptcy, however, does not mean you can discharge your tax debt under a Chapter 7 bankruptcy.
Unpaid tax debts can only be included in a Chapter 13 bankruptcy. Under Chapter 13, you are reorganizing your debts rather than discharging them. This means all your debts are combined and you make monthly payments over a specified period of time to a bankruptcy trustee who then distributes the money to your creditors.
In order to include your tax debt in a Chapter 13 bankruptcy proceeding, you will have to be a wage earner. You will also have to file all tax returns for tax periods within four years of your bankruptcy filing. While in bankruptcy, you must continue to file tax returns and pay taxes as they come due.
If you don’t follow these steps, your bankruptcy case may be dismissed. This means the IRS can begin the garnishment process again and you won’t be able to file bankruptcy again for a certain period of time.
In the future, if you owe money after filing your taxes, you can work with the IRS to set up a payment plan. Depending upon the amount of money you owe, the IRS will set up a plan that allows you to pay your taxes over a period of 120 days or more (this may vary). Longer payment plans have setup fees, but if you can pay your debt in less than 120 days, it won’t cost you anything extra.
Finally, it’s important that you never try to shelter your assets by transferring ownership to another person. For example, it’s illegal to transfer a large sum of money from your savings account to a family member to “hold” for you until you’ve dealt with the IRS. The same is true for cars or real property or any part of your estate that has value.
Understanding Who Can Garnish Your Wages in the U.S.
In general, wages can be garnished by judgment creditors, but there are exceptions to this rule:
Judgment Creditors
A judgment creditor is an individual or party to which a debt is owed and has also proved the debt in a legal proceeding. Consequently, they are entitled to use the judicial process to go after this debt and collect it. Typically, a regular creditor cannot garnish your earnings without first going after you in court and obtaining this money. This means that if you owe money to the credit card company, they cannot garnish your wages without first suing you.
Creditors Who Can Garnish Pay Without a Lawsuit
Depending on the debt you owe, there are some creditors who can garnish your wages without a court judgment. A collector of a federally-guaranteed student loan, federal government taxing agencies that you owe back taxes to, and people to whom you owe child support or alimony, for example.
These creditors may not need a judgment to collect your wages, but they still need to provide some type of notice and time for you to object to these allegations before they can garnish your pay.
IRS Guidelines and Rules for Wage Garnishment
Judgment creditors — and those creditors with a statutory right to collect child support and alimony, student loans, and back taxes — have the ability to garnish or take money from your paycheck until your debt is paid off or resolved. However, they cannot just take it all. According to federal law and state law, there are garnishment amount limits that dictate how much a creditor can take.
If a judgment creditor is garnishing your wages, the federal laws state that this garnishment can be no more than:
- 25% of your disposable income or
- The amount your income exceeds 30 times the federal minimum wage, whichever is less.
Usually, to figure out your disposable income, you will need to take your total paycheck and subtract the required deductions. These deductions include state and federal taxes, Social Security, the state’s unemployment insurance taxes, and required retirement deductions.
They do not include voluntary deductions such as charitable donations, health insurance, life insurance, and saving plans.
7 Steps to Prevent or Stop IRS Wage Garnishment
When the IRS is garnishing your wages, the situation may seem overwhelming. It can cause a tremendous financial strain on you and your family. Fortunately, there are steps that you can take in these situations that can help you get through this challenging time in your life.
1. Pay Off Your Debt in One Lump Sum
If you can, try to pay off your debt as soon as you discover that your wages will be garnished or receive a garnishment order. This is the fastest way you can stop wage garnishment. You can pay these garnishments usually over the phone, online, by mail, by credit card, or even straight out of your bank account.
2. Consider a Repayment Plan
Creating an installment agreement between you and the IRS can mean that you pay off your whole debt in small installments. Better yet, you can come up with a plan that can fit your budget and your financial constraints.
3. Negotiate to Pay Less
You may be eligible to settle your debt for less than what you owe. You would first need to complete the OIS pre-qualifier to determine if you qualify. However, if you are eligible, it can reduce the overall amount of money you need to pay.
4. Declare Hardship
In some instances, contacting the IRS and explaining to them that the wage garnishment is resulting in financial hardship can end up helping you. If the IRS believes this hardship and its effects on you, they can decide that you need to keep your income and can stop garnishing your wages. Declaring hardship will not clear you of your debt, though. Rather, it will just buy you more time to pay.
5. Declare Bankruptcy
You can also declare bankruptcy to stop the wage garnishment. Filing for bankruptcy will automatically block all collection actions, including foreclosure, repossessions, and garnishments. Keep in mind that you should not take this step lightly, however, as you can take a significant hit to your credit score when you file for bankruptcy.
6. File a Dispute
If the wage garnishment notice provides inaccurate information, or you think you do not owe the debt, then you may be able to file a dispute.
7. Get Expert Help
Having your wages garnished can be an extremely stressful experience. The best thing you can in this situation is to contact a tax professional that can help you stop these IRS garnishments. These experts can ensure you are making the right decision and help you understand all the options that are available to you.
Need Tax Help?
Why does the IRS garnish wages? Because they can. Getting a letter from the IRS can be a scary thing. If you’re like most people, you need all of your income to make ends meet, and the thought of the IRS taking any portion of that income is incredibly stressful. That’s why it is so incredibly important to hire tax professionals to help make sure that your income is well-protected, your tax return’s are accurate, and you get the legal advice you need to comply in any dealings with the IRS.
In need of a good tax lawyer? We can offer you a free tax attorney consultation.
