Personal Income Taxes and Bankruptcy: Things to Consider

Each year as Florida residents begin to think about their income taxes and the filing deadline in April, many of those same residents are also considering the potential issues that may arise with their taxes if they are considering a bankruptcy filing. Whether you have unpaid income tax debt, or you are expecting an income tax refund, it is important to know that your tax situation could be relevant to your bankruptcy case, and vice versa. Our experienced West Palm Beach bankruptcy lawyer can point out some of the key things you should consider if you are filing for bankruptcy as tax time approaches.

Will Your Income Tax Return Become Part of the Bankruptcy Estate?

 If you are planning to file for personal bankruptcy, either a Chapter 7 or Chapter 13 filing, and you are also anticipating a tax refund this year, you are likely wondering if you will be able to keep the refund. The answer to that question will depend on a few factors, including the type of bankruptcy you are filing and your individual financial circumstances.

For Chapter 7 filers, in order to keep your tax return, you will either need to file your taxes and receive the refund, and then spend it, prior to filing your Chapter 7 bankruptcy petition, or you will need to use an exemption to exempt the amount you receive in the refund. Florida’s “wildcard” exemption allows you to keep up to $4,000 in value of any property you choose if you do not use the homestead exemption, or up to $1,000.

For Chapter 13 filers, there are a number of ways you can keep your tax return. You can also file, receive the refund, and spend it prior to your filing. At the same time, many Chapter 13 repayment plan terms allow debtors to keep their income tax return. You may be able to keep the refund if you are paying a majority of your unsecured debt over the course of your plan, or you can seek court approval to keep the refund if you have a hardship.

 Can You Have Personal Income Tax Debt Discharged? 

Personal income tax time also raises the question of whether personal income tax debt can be discharged. Tax debt is among the “exceptions to discharge,” but there is an exception for some types of personal income tax debt. All of the following must be true for the debt to be dischargeable:

• Debt is federal income tax debt;
• Debt is at least three years old (from the date of your bankruptcy filing);
• Internal Revenue Service (IRS) assessed your tax debt at least 240 days prior to the date you filed for bankruptcy;
• You filed a tax return for the debt owed; and
• You did not commit tax fraud or tax evasion.

Contact Our West Palm Beach Bankruptcy Lawyers Today 

If you have any questions about personal income taxes and consumer bankruptcy, it is important to seek legal advice as soon as you can. Whether you have concerns about keeping your income tax refund or your ability to have personal income tax debt discharged as part of your bankruptcy case, one of the experienced West Palm Beach bankruptcy attorneys at Kelley, Fulton, Kaplan & Eller can discuss your circumstances with you. We are here to assist you with all aspects of bankruptcy as they pertain to your personal income taxes, and we can begin working with you today on your bankruptcy filing. Contact us for more information about the bankruptcy services we provide to South Florida residents.

Sources:

law.cornell.edu/uscode/text/11

leg.state.fl.us/Statutes/index.cfm?App_mode=Display_Statute&URL=0200-0299/0222/Sections/0222.25.html