If you are considering filing bankruptcy, or have already done so, you may be anticipating filing your taxes and wondering how taxes owed or refunds received will work into a bankruptcy proceeding. This post will explore how your tax return affects your bankruptcy.
Before exploring the status of any tax refunds, let’s be clear about taxes owed. If you owe taxes, that debt will not be discharged during bankruptcy, whether you file Chapter 7 or Chapter 13. Also, any overdue taxes or penalties will remain.
Tax Refunds Are Assets
You may have received your refund directly into your bank account, the refund may be in process, or the refund may result from the taxes you file for the previous year. Any way you look at it, tax refunds are assets. And when you file for bankruptcy all of your assets become part of the proceedings. That fact does not necessarily mean that you will lose your tax refund. Whether you keep all or a portion of it depends on a variety of factors.
Timing – Not Yet Filed
If you have not yet filed bankruptcy, but plan to do so within the year, it is a good idea to adjust your withholding to minimize any refund you may receive. This must be done carefully; if you miscalculate and end up owing taxes, those become nondischargeable debts. Another way to plan ahead for bankruptcy is to designate more of your income to your employer IRA or 401k. Those retirement contributions will not become assets liable to exploitation during bankruptcy.
Protect Refund With Exemptions
Whether you file Chapter 7 or Chapter 13 bankruptcy, you are entitled to exemptions. There are both federal and state exemptions, and Wisconsin is one of only 19 states that allows you to choose which set of exemptions you use. The experts at Burr Law can help you determine which is better for your particular situation. While Wisconsin does not have a specific federal tax refund exemption, you can protect it with a wildcard exemption. In any event, your tax refund can become an asset protected through your exemptions, and you would then retain it.
Refund Used For Necessary Expenses
If you spend your tax refund on necessary expenses like mortgage or rent payments, that is allowable. Other necessary expenses include food, medical expenses, and clothing. Basically, as long as you are not spending it on luxury items, it’s all right for you to spend the tax refund you receive. You can also use your tax refund to pay your bankruptcy attorney and associated court costs.
Timing – Refund From Income After Filing
Any refund that results from income you earned after filing for bankruptcy is yours free and clear. Also, if any portion of the refund results from income your earned after the filing date, that portion is available to you without restriction. Again, this is a delicate calculation and it is vital that you have an experienced bankruptcy attorney from Burr Law to guide you through the process. You want to adhere to the law in all instances.
The issue of tax returns during bankruptcy is complex. With the experts at Burr Law, you can feel confident that all of your individual circumstances will be carefully considered. We will find the best possible solutions for your financial situation.