How Does Bankruptcy Affect Taxes?Wednesday, September 30th, 2020, 5:21 pm
If you declare bankruptcy, will that affect your tax return in any way? The answer is yes, it will have an impact on your taxes. The type of bankruptcy you file for will determine what happens with your taxes, especially if you receive a refund.
You Must File Taxes While in the Bankruptcy Process
First, it’s absolutely necessary for you to file taxes while you’re still going through the bankruptcy period. If you don’t, the court can automatically dismiss your case. You can file for an extension, though. Just make certain that the court knows that you have either filed your return or have asked the IRS for an extension.
Is Forgiven Debt Taxable?
In some cases, forgiven debt is taxable. However, any debt forgiven via bankruptcy is not a taxable income. If you do receive a 1099 tax form from a creditor who forgave some or all of your debt, you will want to talk to a CPA or other tax expert about how to handle it. There is a special form that needs to be filed to show the IRS that the debt was discharged through bankruptcy and should not be taxed.
Do You Have to Pay if You Owe?
Yes, if you owe taxes, you have to (and need to) pay them. IRS debt, although with court-ordered fines, child support, and student loans, typically can’t be discharged through bankruptcy. However, the IRS will not garnish your wages or otherwise attempt to collect on any back taxes you owe until your bankruptcy case is finalized.
What About Refunds?
If you get a tax refund, you may get to keep it. However, it is seen as an asset. This means that if you filed Chapter 7 bankruptcy, that tax refund may be intercepted and used to pay off some of your debts. If a year as passed since your bankruptcy, though, you will get to keep the refund. If you filed Chapter 13 bankruptcy, the refund is classified as disposable income. This means that you can use that refund to pay on your monthly debt payments.
If you have questions about how bankruptcy will affect your particular tax situation, we can help. Contact Michael F. Kanzer and Associates today to schedule a free meeting.