What Happens to Taxes During Bankruptcy?
If you’ve filed for bankruptcy, there’s good news and there’s bad news. The good news is that with good representation and a willingness to change, you will likely be able to discharge all or most of your debt. The bad news is that you still have to file taxes. Tax season bankruptcy in Montgomery County, TX involves a slightly different way of filing taxes.
As always, if you’re filing or considering filing for bankruptcy, see a licensed attorney as soon as possible—and you may also want a certified tax preparer to help you file your taxes.
Filing income taxes
When you file for bankruptcy, your assets are considered an estate, and the trustee is the person appointed to oversee them. Therefore, you will need to file a 1040 for yourself as well as a 1041 on behalf of the estate. Depending on which type of bankruptcy you filed for, either you or the trustee will file the 1041.
What happens to my tax return?
Your tax return is considered an asset, and is therefore part of your bankruptcy estate. However, you may be able to protect it with a bankruptcy exemption, or a wildcard exemption. Different states have different rules as to what kind of property is exempt and how much. Rarely are tax returns exempted from bankruptcy proceedings, but it can happen.
There is also a wildcard exemption, where you can protect any one asset of your choice. If you’re expecting to receive a large tax return, you may choose to protect this asset over all your others.
If you’re filing for Chapter 7 bankruptcy, keep in mind that while your tax return is part of the estate, you can plan for it ahead of time. Either file bankruptcy after receiving your return and spending it (on necessities, not other assets), or adjust your deferred salary earlier in the year to contribute more money to your retirement fund.
If you’re filing for Chapter 13 bankruptcy, your tax return is part of your “total disposable income,” which your creditors are entitled to. You may be able to protect it with an exemption, or your trustee may allow you to keep it. Finally, you can adjust your tax withholding to reduce your refund, but do so well before you file, lest it look like you’re trying to hide income.
Whatever you choose to do, make sure you run it by an attorney before you make mistakes that could jeopardize your case.
Tax season bankruptcy? Hire a skilled attorney in Montgomery County, TX
James R. Jones, Attorney at Law has offered skilled bankruptcy representation since 1993. Our team is dedicated to helping you through the bankruptcy process, and is licensed to appear in state court as well as the United States District and Bankruptcy Courts in the Southern District of Texas and the United States Court of Appeals for the 5th Circuit. Need help with your bankruptcy filing? Call us today to arrange a free 30-minute consultation. We look forward to meeting with you.
Categorised in: Bankruptcy