Bankruptcy and income tax?
pumis_wolf asked:
My husband and I are on the verge of filing ch. 7 bankruptcy. We decided it was our last option about 9 months ago and met with an attorney. One question that has come up since that meeting is if filing will affect our next income tax return. (not receiving anything in return, only getting a portion, would the income tax filing be different ect ect.) The attorney is very hard to get a hold of other wise I would just ask him. I thought I might ask here first, then last resort, talk with the attorney. Please help if you know anything on the subject.
Tax Attorney
My husband and I are on the verge of filing ch. 7 bankruptcy. We decided it was our last option about 9 months ago and met with an attorney. One question that has come up since that meeting is if filing will affect our next income tax return. (not receiving anything in return, only getting a portion, would the income tax filing be different ect ect.) The attorney is very hard to get a hold of other wise I would just ask him. I thought I might ask here first, then last resort, talk with the attorney. Please help if you know anything on the subject.
Tax Attorney
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Tax Attorney
The timing of the filing of the bankruptcy action and the filing of your tax return can affect whether you’ll be allowed to keep your refund or whether it will be treated as part of the BK estate. Your attorney is the only one who can advise you on that.
From a tax perspective, there are 2 principal considerations:
1. Any current tax debt that is less than 3 years old cannot be cleared in bankruptcy. Older tax debts MIGHT be dischargeable.
2. Any debt forgiveness resulting from bankruptcy is NOT taxable income to you.
Tax Attorney
I have at work an approximately one inch booklet about how bankruptcy and taxes work together. Mr. Bostonian gave you a good broad outline, but if you have a specific question, either ask your attorney or a good tax preparer that is familiar with it. Many rules, many exceptions, and the judge has broad authority. And the laws recently changed.
Tax Attorney
I think the other two answers are to questions you didn’t ask. Ordinarily a tax refund is applied to the oldest tax period of any outstanding tax due. If you file bankruptcy now, in 2008, there is no refund to be had. If you file in 2009, any refund after filing would be an asset of your bankruptcy estate and perhaps an exempt asset. If you anticipate a refund you should time your bankruptcy filing to get the maximum benefit of the right to a discharge of tax liabilities and use of any refund. If you can calculate where you are right now, you can adjust your W-4 to minimize your refund between now and the end of the year. (Adjust it back after January 1.)