It’s tax season, which means if you’ve filed for bankruptcy recently or you have already been awarded your discharge, you need to be aware of the differences in how you will file your taxes.
When you file for bankruptcy, you are assigned a bankruptcy trustee who handles your affairs and your debt is moved into an estate. Whether you have filed for a Chapter 13 or a Chapter 7 bankruptcy, you will file Form 1040 just as you have in prior years. Because your bankruptcy estate is a separate taxable entity, your trustee will file a 1041 on behalf of your bankruptcy estate.
Discharged Debts as Income
In bankruptcy, any debts that are discharged do not count as income you have earned. Many times when a debt has been discharged, the creditor who discharged it will send you a form 1099-C notifying you of a cancellation of debt. To make sure you don’t have to pay taxes on any debts in the 1099-C or any other debt that was discharged in bankruptcy, you should file a Form 982. This form will allow you to show what debt was discharged in bankruptcy and will instruct you on how to reduce your tax attributes as well.
Holding Onto Tax Returns
In a Chapter 7 bankruptcy, your nonexempt assets are put into your bankruptcy estate and liquidated by your trustee to pay the debts that do not get discharged. If you have a tax return, this money is not exempt and thus will be added to your estate. However, it is possible to keep your tax return, depending on when you file. The list below gives you an idea of when you may get to hold onto your return:
- Tax year before bankruptcy was filed: Your refund will go into your estate and be used to pay debts.
- Tax year that bankruptcy was filed: This refund is based on income you earned after you filed, not before you filed, so it’s possible you will get to keep part or all of your refund.
- Tax year after bankruptcy was filed: This refund is not affected by your bankruptcy, so you get to keep the entire refund.
Make Sure to File On Time
Filing for bankruptcy may create an automatic stay against your creditors, but it does not mean that you can stop worrying about your taxes. You need to file your taxes on time, or file a request for an extension in the appropriate amount of time in order to avoid getting penalized by the IRS. What’s worse, the Bankruptcy Code states that those who do not file their taxes or extension in a timely manner can have their bankruptcy cases dismissed.
Let’s face it. Filing taxes can be somewhat of a mystery already, and when you add a bankruptcy to the mix, you may be even more lost. It’s a good idea to talk to a bankruptcy attorney to get a full understanding of how you should file your taxes after you’ve filed for bankruptcy. Call the Ohio bankruptcy attorneys at (216) 586-6600 to discuss your options and get your questions answered.