Tag Archives: tax return

Filing Your Income Taxes & Bankruptcy: What You Need to Know

Tax Return 1040The April 15th deadline is looming — it’s almost time to file your 2013 tax return. If you are struggling with debt and thinking about filing for bankruptcy, you may have some questions about how your tax return and bankruptcy will affect each other. For example:

  • Should you file your tax return if you are considering bankruptcy?
  • If you owe taxes this year, can you get rid of the debt in bankruptcy?
  • Will you get to keep your tax refund if you file for Chapter 7 bankruptcy?

Here are answers to some common questions about tax filing time and bankruptcy.

Should I File a Tax Return If I am Thinking About Bankruptcy?

Yep. When you file for Chapter 7 or Chapter 13 bankruptcy, you are supposed to provide the bankruptcy trustee with copies of your tax returns for the previous two years. If you don’t have a good reason for not filing those returns, the trustee will likely require that you file them before your bankruptcy gets under way. (To learn more, see Nolo’s article Gathering Your Documents for Bankruptcy.) So you might as well do it now. If you have a good reason why you can’t file your tax return this year, talk to a bankruptcy attorney.

If you file for Chapter 13 bankruptcy, the trustee will probably require that you provide him or her with your tax return for each year that you remain in the bankruptcy case.

If I Owe Taxes This Year and Can’t Pay Them, Can I Wipe Them Out in Chapter 7 Bankruptcy?

Wouldn’t that be great? But no, you cannot discharge (eliminate) recent income tax debts in bankruptcy. So if you owe a bundle this year and don’t pay up, that debt to the IRS will survive your bankruptcy. You can, however, discharge older income tax debts if they meet certain criteria. (For details, see Nolo’s article Eliminating Tax Debts in Bankruptcy.)

Most people know that credit card debt is discharged in Chapter 7 bankruptcy (with a few exceptions). But if you’re thinking about getting rid of tax debt by paying your tax bill with your credit card, think again. Bankruptcy laws specifically state that if you put nondischargeable income tax debt on your credit card, that part of your credit card debt won’t be wiped out in bankruptcy. (See Can I discharge credit card charges used to pay off income tax debt?)

What Happens to My Tax Debts in Chapter 13 Bankruptcy?

If you file for Chapter 13 bankruptcy, you pay tax debts through your plan (which lasts from three to five years). You repay nonpriority tax debts at a discount, and the remainder is discharged at the end of your case. You have to repay priority tax debts in full, but you often pay them at 0% interest and because you pay them over the life of your plan, this gives you more time for repayment. (To learn more, including which tax debts are priority and which are nonpriority, see Nolo’s article Tax Debts in Chapter 13 Bankruptcy.)

If I Get a Tax Refund This Year, Will I Lose It if I File for Chapter 7 Bankruptcy?

If your concern is not tax debt, but your tax refund, then a little planning is in order. Here’s why.

When you file for Chapter 7 bankruptcy, all of your property and assets become part of the bankruptcy estate. Unless your property is protected by law (the laws that allow you to keep certain property in bankruptcy are called exemptions), the bankruptcy trustee can sell it and use the proceeds to repay your creditors. (You can learn how this works in Nolo’s article Exemptions in Chapter 7 Bankruptcy.)

If you get a tax refund this year and then file for bankruptcy, that refund becomes part of the bankruptcy estate. You may be able to protect the money by using an exemption. Most states don’t have a specific exemption that covers tax refunds, but some allow you to exempt a certain amount of cash. And many states have a wildcard exemption that you can use to protect any type of property. (You can find your state’s exemptions in Bankruptcy Exemptions by State – choose the link for your state.)

But if you stand to lose your tax refund in bankruptcy, you could use another strategy to keep the money – delaying your bankruptcy filing. After you get your tax refund, spend it on necessities (like your rent or food). Once it’s gone, then file for bankruptcy. If you plan to do this, however, speak with a local bankruptcy attorney first. Bankruptcy courts vary as to what types of expenses count as “necessities.” And some attorneys may advise you to keep your tax refund in a separate account. (To learn more, see Nolo’s article How to Spend Down Tax Refunds in Chapter 7 Bankruptcy.)

Tax Tips: Student Loans and Your 2013 Tax Return

Tax Return 1040As you get ready to file your 2013 tax return, review these tax tips if you have student loan debt. Understanding how taxes and student loan payments intersect could help you save money. And if you will soon pay off a student loan with forgiven principal, you might need to prepare yourself for a tax hit.

Tax Tip 1: You Might Be Able to Deduct Interest on Student Loan Payments

If you paid interest on student loans during 2013 and your modified adjusted gross income (AGI) is less than $75,000 if you are single, and less than $155,000 if you are married filing jointly, you can deduct up to $2,500 on your 2013 federal taxes. (There is no deduction if you are married filing separately.)

The amount you can deduct depends on:

  • How much student loan interest you paid.  If you paid less than $2,500, then your deduction is limited to the amount you actually paid.
  • How much income you earned. If your AGI is between $60,000 and $75,000 for singles, or between $125,000 and $155,000 for married couples filing jointly, the IRS prorates your deduction.  This means your deduction will be lower than if your income was less than $60,000 (single filing) or $125,000 (married filing jointly).

For details on the formula for determining your tax deduction, what counts as a student loan interest, and examples of how this works, see Nolo’s article Tax Deductions for Student Loans.

Tax Tip 2: Filing Status Can Reduce Your Future Student Loan Payments

If you are married and are paying student loans under one of the federal income-driven student loan repayment programs, your filing status can affect your student loan payment amount for the next year.

Under the federal Income Contingent Plan (ICR), the Income Based Plan (IBR), and the Pay as You Earn Plan (PAYE), the amount of your student loan payment is based on your income, family size, and basic living expenses. Each year, the loan servicer uses the information in your tax return to reset the amount of your student loan payment. (Learn more about how these repayment plans work in Nolo’s article What’s the Difference Between Income Contingent Repayment Plans and Income Based Repayment Plans?)

If you are married and file a joint tax return, your loan servicer will consider the income of both you and your spouse in setting your student loan payment  amount. But, if you are married and file a separate tax return, your loan servicer will consider only your income when setting your student loan payment amount. If your spouse’s income is significant, filing separately could reduce your student loan payment for the next year.  (For more information and examples of how this works, see Nolo’s article Tax Filing Status and Student Loan Payments.)

Tax Tip 3: If You Have Forgiven Student Loan Debt, You Could Face a Tax Hit

If you enter into one of the federal flexible student loan repayment plans, such as ICR, IBR, or PAYE, your student loan payment is determined by your income. After you have made payments for the full loan term (which can be up to 30 years), if any debt remains, the federal government will forgive it.

The problem, come tax time, is that the IRS treats forgiven debt as income. If the forgiven student loan amount is more than $600, your loan servicer will send you a 1099-C and you’ll have to report the forgiven debt on your tax return as income. This can result in a hefty tax increase.

Fortunately, there are some exceptions to this tax rule. For starters, forgiven loan debt for some types of student loan forgiveness programs doesn’t count as income for IRS purposes.  If the government discharged (wiped out your loan) for certain reasons, that also does not count as income. And you might be able to avoid a tax bill if you were “insolvent” at the time of forgiveness. (Learn more about the exceptions to paying income tax on forgiven student loan debt.)

If the federal government has forgiven, or will soon be forgiving, some of your student loan debt, talk with a tax expert to determine your tax liability, any exceptions you may qualify for, and how to prepare for the tax hit, if it comes to that.

Do I Have to Report the Amount of Debt Discharged in Bankruptcy on My Tax Return?

Tax Return 1040ASK LEON 

Bankruptcy expert Leon Bayer answers real-life questions. 

Hi Leon,

I filed Chapter 7 bankruptcy earlier this year and got a discharge. Our bookkeeper says he needs to know the total amounts discharged for our 2013 tax return. My lawyer says he doesn’t know and I’ll have to pay more fees if I want him to try and find out. I didn’t see it on the discharge notice from the courts. I am going crazy trying to find the number.

Roger

Dear Roger,

You’re an early bird. This is a question I normally don’t see until tax season. I am sorry this is driving you crazy.

First, I’ll explain for you (and your lawyer) why you won’t find anything that lists the amount of money you discharged. Next, I’ll explain for you (and your lawyer and bookkeeper) why you don’t need to know the discharge amount for tax purposes.

Bankruptcy Doesn’t Discharge Specific Dollar Amounts

The bankruptcy court didn’t make a determination on the amount of any particular debt that you discharged. That’s why you can’t find the number anywhere. There are a number of reasons why bankruptcy law works this way.

There’s no point in figuring out exact amounts. Suppose you had an ongoing dispute over an amount that you owe to a bank – you say it’s $100 and the bank says it’s $150. If the debt is dischargeable, it doesn’t matter who is right. You don’t have to pay it, so why should the court figure out the exact amount?

Determining exact dollar figures would be costly and time-consuming. If the discharge did apply only to a specific dollar amount, then the court would have to determine that amount. This would require a court trial or some other time-consuming procedure to determine how much you owe for every debt that you have.

The amount you owe changes constantly due to interest. Most of the debts you discharged probably accrued interest during your bankruptcy case. Because of interest piling up every day, the amount you owe constantly changes. This means that even if there was no dispute over the amount you owed, you could almost never list the correct amount on your bankruptcy papers.

It’s much easier if the bankruptcy discharge simply eliminates an entire debt. So that is what the law does.

You Don’t Need Discharge Amounts for Your Tax Return

Luckily, you don’t need to know the amount of your discharged debt for tax reporting purposes. The amount of debt you have discharged in bankruptcy does not get taxed nor is it reportable as income. The figure does not go on your 1040 tax form. In fact, even if you wanted to put it on your form, there’s no place for it.

You can stop going crazy.

— Leon

Leon Bayer is a Los Angeles bankruptcy attorney.  He is a partner at Bayer, Wishman & Leotta, a California law firm specializing in bankruptcy.  The opinions and advice in this blog post are from Mr. Bayer alone, and should not be attributed to Nolo.  By answering a question on this blog, Mr. Bayer does not become your lawyer.

Find Leon on Google+