How To Excuse A Tax Refund
The easiest way to excuse a tax refund is to show that you’ll need to use the refund to make your plan work. However, most people can’t justify a “keep the return” provision in the plan.
That doesn’t mean you can’t seek relief. If you later run into a problem during the plan, you can modify it by asking the court to excuse a particular refund because your reasonable expenses have increased. However, this won’t work if the trustee can show that the refund isn’t needed to cover expenses.
Here are the specifics for each approach.
Ways To Protect Your Tax Return In Bankruptcy
A tax refund is a valuable asset to both and your bankruptcy creditorsand you’ll likely want to keep as much of it as possible. Maximizing your portion in bankruptcy takes careful planning and will depend on the bankruptcy chapter you file, the timing of your filing, and the state in which you live.
Why Was I Sent A 1099
A 1099-C is generated by a financial institution, such as a lender, after a qualifying event. A qualifying event occurs when the entity has written-off or canceled a debt in excess of $600. Cancelling the debt requires the bank to send you the 1099-C regardless of whether you received a discharge in bankruptcy. This means the 1099-C you received was likely generated appropriately, but does not mean that you must take it as actual income on your tax return. You will need to file the appropriate forms with the IRS to exclude the canceled debt as income on your 1040 tax return.
Note: Not all institutions send a 1099-C, so do not expect one for each debt you discharged. In addition, sometimes a 1099-C may be sent a few years after the bankruptcy discharge.
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How Do I File My Taxes
After bankruptcy, you file taxes much the same way that you would any other year by using Form 1040. However, unlike before, your bankruptcy trustee will also be filing Form 1041 for your bankruptcy estate. Unless you are filing for Chapter 11 bankruptcy, the trustee will handle this on their own.
When you file bankruptcy, there is an assumption that you will pay all upcoming taxes and avoid taking on additional debts. This is why it is crucial you file your tax returns by April 17th or request an extension. Your case may be dismissed if you do not pay or request an extension by then, in which case your debts will not be forgiven. It is better to file on time and request an installment plan than to avoid filing altogether.
Spend Your Tax Refund Before You File For Bankruptcy
One of the best ways to keep your bankruptcy from affecting your tax refund is to file your tax return, receive the refund, and spend it before filing your petition. As long as you use the money for permissible expenses, you wont be required to repay that amount to the bankruptcy trustee. If you are preparing to file for bankruptcy, you should use your tax refund on things like:
- Housing expenses
- Food
- Medical care or equipment
- Car payments, maintenance, and repair
- Education tuition, books, or expenses
You should avoid spending your tax return on unapproved expenses like:
- Repaying any one credit card
- Payments to family members
If your tax refund goes to these unapproved expenses, it could be up to you to repay those amounts back to the trustee after the bankruptcy begins. The best way to avoid this is to discuss how you plan to spend your tax refund with your bankruptcy attorney beforehand and give him or her copies of your receipts once the money is spent.
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Can I Keep My Tax Refund
It depends on your circumstances. You must inform your trustee when you receive your tax refund. You also need to provide a copy of your ATO Notice of Assessment. It’s important to not spend your tax refund until your trustee makes an assessment and informs you if they have a claim in the refund. Your trustee calculates the following and notifies you of the outcome:
- Refunds for income you earn before you enter bankruptcy are assets your trustee can claim.
- Refunds for income you earn after you enter bankruptcy form part of your assessable income for compulsory payments. If your assessable income exceeds a set amount you may need to make compulsory payments. For more information about compulsory payments during bankruptcy see Income and employment.
You still need to lodge your tax returns as your obligations to the ATO remain during bankruptcy.
Why Did The Irs Offset My Tax Refund
The refund offset is a favorite collection method for the IRS. The IRS knows the amount of the money available and where it is. It is the easiest form of collection. But, if the IRS tries to seize the amount of money out of your bank account, they may find that there is no money in your bank account. Or, the IRS could find that your bank account is commingled with the money of another person who doesn’t owe the IRS. These complications donât exist with a tax refund offset. The problem with commingled money in a bank account with your spouse doesn’t occur if you file a joint tax return with your spouse. The same treatment applies to a tax refund from a joint tax return. Even if one spouse doesn’t owe back taxes, the IRS will take the entire refund. If you are a non-owing spouse and the IRS is collecting your spouse’s tax debts from your part of the tax refund, you need to get an injured spouse allocation. A good accountant can help you to get this allocation. This allocation provides you with relief by allocating your portion of the refund to you without the offset. Do not confuse an injured spouse allocation with innocent spouse relief. Injured spouse allocations deal with tax refunds. Innocent spouse relief deals with relief from all collection activities against you caused by your spouse’s tax debts.
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Tax Refunds In Chapter 13
The bankruptcy code requires that all disposable income received during a Chapter 13 case be paid into the plan. Most Chapter 13 trustees treat a tax refund received during your case as extra disposable income since you could have received it during the year, but over-paid your tax obligation instead. A Chapter 13 case will last from 3 to 5 years. Each tax refund received during your case is subject to being paid into your plan. These refunds dont count as plan payments and dont shorten your plan. They are simply extra payments to your creditors.
You may be able to keep all or a portion of your tax refund if you have unforeseen circumstances or expenses that you need to use it for. Some examples are: Car repairs Emergency home repairs, appliance or furnace replacement Medical expenses Funeral expenses
If you need to keep your refund for these types of expenses, your attorney will need to file a motion with the court asking for permission to keep the funds. You may need to provide documentation, such as repair estimates or bills, to justify the need to keep the money.
A better option is to adjust your withholding before you file your case to minimize your refunds. Some jurisdictions allow you to keep up to a certain amount of your refund , and if your refund is below that amount, you can keep it without having to file a motion.
Can The Chapter 7 Bankruptcy Trustee Take The Refund From A Jointly Filed Tax Return
As an experienced Denver bankruptcy lawyer and who practices in most areas of Colorado, I frequently encounter situations where one spouse files for chapter 7 bankruptcy while the other does not.
An expected Federal or state income tax refund is deemed by the Bankruptcy Code to be included within the debtors bankruptcy estate, such that the chapter 7 trustee can compel that these funds be turned over to be later remitted to unsecured creditors. For this reason, and particularly as this issue usually arises in the first three months of the year, I will recommend that my client receive AND spend down the tax refund BEFORE the bankruptcy is filed in Colorado, such that the tax refund is excluded from the bankruptcy estate. Another strategy is for the debtor to lower the amount of income tax withheld from his/her paycheck such that a tax refund will not be expected .
However, for many filers, waiting to receive the tax refund prior to filing for bankruptcy is simply not an option as the reason for filing may be quite pressing. For instance, a debtor may expect to receive a $500 tax refund but cannot afford to wait to receive the refund from the IRS as the mortgage lender may have scheduled a foreclosure sale date on the home for within a week after the client first contacts me.
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Losing Your Tax Refund In Chapter 13
Chapter 13 filers, unfortunately, are more than likely going to lose their tax refunds. This is because they are engaged in a repayment plan with their creditors that lasts three to five years. Creditors are prioritized in Chapter 13, and as a consequence, its possible that certain creditors will only receive some repayment.
How much those creditors can get is often a factor of how much disposable income you have. Because a tax refund isnt taken into consideration when weighing your monthly expenses against your monthly income, it is considered disposable income. That means the bankruptcy trustee is likely to seize and use your tax refund to pay off your creditors.
Its possible to exempt your tax refund by designing a repayment plan that repays all of your debt. When you can afford the monthly payments and satisfy all debt within three to five years, there will be no need to seize your tax refund.
You can also ask for your tax refund to be excused from consideration in your Chapter 13 repayment plan. However, dont expect this to occur unless you have an expensive emergency and your tax refund can prevent you from sliding into further debt.
If You Are Considering A Chapter 13 Bankruptcy Here Are Some Things To Keep In Mind:
- You must file or get an extension on all applicable federal, state and local tax returns that come due after the case is opened.
- A Chapter 13 filing does not prevent the IRS from intercepting your refund and applying it to the prior liability.
- You should pay all post-petition income taxes in a timely fashion if possible.
- The failure to file tax returns or pay current taxes when they are due can cause the bankruptcy court to dismiss your case or convert it to chapter 7.
A clear understanding of the tax consequences of a bankruptcy filing is an essential step for anyone considering bankruptcy and seeking a brighter future after bankruptcy.
At Sasser Law Firm, our board-certified bankruptcy attorneys have assisted thousands of North Carolina residents in charting a course through financial hardship and addressing tax liability issues. We work with you to identify the best options based on your individual situation. Our goal is to help you take the steps necessary to relieve your financial stress and get back on sound footing. If you are considering bankruptcy and have questions about the tax implications, contact a board certified attorney at Sasser Law Firm for a free consultation.
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Take Your First Step Towards A Debt Free Life
If you are overwhelmed by debt and live in the Toronto area, call us at 416-498-9200 to book a FREE, confidential appointment. We will review your financial situation in detail and discuss all of your options with you. Alternatively, you can fill out the form below and our team will reach out to you.
When Did You Earn The Tax Refund
When figuring out whether you can keep your tax return, the first step is determining whether your tax refund came from income earned before or after filing bankruptcy.
Any return that results from income earned after filing for bankruptcy is yours to keep. A tax refund that’s based on the income you earned before filing will be part of the bankruptcy estate no matter if you receive it before or after the filing date.
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Get step-by-step instructions on filing Chapter 7 bankruptcy in Nolo’s How to File for Chapter 7 Bankruptcy.
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Cut Your Creditors Out Of Your Tax Refund
Part of your pre bankruptcy planning should include a look at your current year withholding.
If you usually get a substantial refund, or if something in your tax life suggests youll get a big refund for the year you file bankruptcy, do something!
The trustee can demand a portion of the refund only if there IS a refund.
You Can Wipe Out Or Discharge Tax Debt By Filing Chapter 7 Bankruptcy Only If All Of The Following Conditions Are Met:
- The debt is federal or state income tax debt. Other taxes, such as fraud penalties or payroll taxes, cannot be eliminated through bankruptcy. In other words, the debt needs to be a regular tax payment that you owed either the State of Wisconsin or the federal government.
- You did not willfully evade paying your taxes or file a fraudulent return. Bankruptcy will not help in these circumstances. Your actions need to have been lawful.
- Your tax debt is at least three years old. The original tax return must have been due at least three years prior in order to effectively file for bankruptcy. So if you were to file for bankruptcy in April 2020, for instance, this would apply to your 2017 taxes that were due April 15, 2018.
- You filed a tax return at least two years before filing for bankruptcy. To eliminate a tax debt, a return for that debt must have been filed. Generally, if your extensions expired and you filed late, you have not filed a true return and will not be able to eliminate the tax debt.
- The tax debt must have been assessed by the IRS 240 or more days before you file for bankruptcy, or must not have been assessed yet. This is called the 240 day rule. If the IRS suspended collection efforts due to a compromise or previous filing, this deadline may be extended.
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Other Bankruptcy Tax Refund Issues
If we file your case later in a year , it is likely that the trustee will ask for a copy of that years tax return. I know this sounds strange since its September and you have not filed a tax return for the current year. The trustee may request a copy of the tax return for the current year as soon as you file it. He will then review the tax return to see if you are going to be receiving any refunds. If you are, he will ask for a pro-rata portion of the refund.
Since your initial appointment with the attorney may be several months before you actually file your case, we want you to plan for your bankruptcy by adjusting your payroll deductions to avoid having the trustee take your refund.
Bottom line: You should plan to have a minimal refund if possible or wait for the refund to be received prior to filing for bankruptcy. No refund means you get to keep your money in each paycheck and avoid turning over a big refund to the trustee.
Income Tax & Consumer Proposals
When you file a consumer proposal in Canada, taxes get treated as unsecured debt that is, as long as you dont have a lien issued against your property by the CRA.
The way consumer proposals and tax debt works is that a proposal can help reduce your tax debt alongside any other debt owed to other creditors. Consider how filing your income tax while in a consumer proposal works in Canada:
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Tax Refunds In Chapter 7
There are a few ways to protect a tax refund from being taken by the Chapter 7 trustee. First, your state may have an exemption that protects the refund. For example, many states have an exemption that covers Earned Income Credit. If part of your refund is made up of Earned Income Credit, you can exempt that portion of the refund and the trustee cant take it. You may also be able to use a cash exemption or a wildcard exemption to protect all, or a portion, from being taken by the trustee. If you cant exempt all of it, the trustee may not take any of it if the non-exempt portion is small enough that the trustee doesnt think there will be enough to make a meaningful payment to creditors.
Second, plan ahead. If you routinely received large tax refunds in the past, and expect to do so again, adjust your withholding so that less is taken out of your paycheck to minimize the amount of your refund. The smaller the refund, the less likely that a trustee will be interested in taking it, and the less that you have to try to exempt. The IRS website has a withholding calculator to help you figure out how much you should be withholding so you can make any needed adjustments.
Third, get your tax refund and spend it before you file your bankruptcy case. Make sure you spend it on necessary expenses, such as:
Rent or mortgage payments Medical expenses Car payments, maintenance and repairs Education expenses Attorneys fees and costs for your bankruptcy filing
