Bankruptcy Tips for Tax Time

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Bankruptcy Tips for Tax Time

It’s that time of year again. W2s and other forms are rolling in, one by one, through the mail. Whether you’re anticipating a sweet refund or are in danger of adding more liability to your IRS debt, it’s important to take tax time into account when you start thinking about filing for bankruptcy.

As Philadelphia bankruptcy lawyers there are five tips we’d like you to consider before you turn in that tax return—or file your bankruptcy case—this year.

Consider your refund before you file for bankruptcy.

Correctly navigating both your refund and the bankruptcy your planning boils down to a few key issues:

  • The type of bankruptcy you’re filing.
  • The way the money is spent.

If you’re filing a Chapter 13 bankruptcy you may want to get and spend your refund before you file it. Otherwise the refund could end up in your bankruptcy estate, and can be used to pay off creditors.

If you’re filing a Chapter 7 bankruptcy it’s often possible to treat the refund as one of your bankruptcy exemptions, which means you could file for bankruptcy before or after you receive it.

Either way, now is not the time to use your refund on a big screen TV. Make sure you spend it on necessary expenses. Allowable expenses could include your housing and utility payments, food, clothes, medical bills, car payments, car repairs, or payments related to your child’s education. If you’re not sure whether a proposed expense is a good use of your refund, you should consider speaking to your bankruptcy attorney. Keep good records; you want to be able to show where the money went.

Know your tax consequences.

Many of our clients are initially afraid to file for bankruptcy because they think the discharged debt might be counted as income and taxed. Nothing could be further from the truth; forgiven debt may be treated as income, debts discharged through bankruptcy are not.

Take advantage of deductions generated by your bankruptcy case.

Chapter 13 payments are deductible at tax time, offering a nice break to debtors who can certainly use one.

However, don’t try to claim your legal fees. They’re deductible, but you won’t be making or enjoying that deduction directly. Your trustee will deduct them on behalf of the estate.

When in doubt, consult either your attorney, your accountant, or both.

Understand what it takes to discharge federal tax debt.

It is possible to discharge income tax debts in a bankruptcy.  However, we often encourage our clients to take advantage of IRS relief programs first.

Don’t try to do it on your own; a bankruptcy attorney can step in to handle the IRS for you, which means you’re much more likely to get a good outcome. IRS matters are some of the most complex legal matters in the world, and one mistake can create a lot of trouble down the road.

Don’t be afraid to file.

Financial problems can turn anyone a little bit avoidant. Some of our clients just stop filing their taxes. “What’s the point when we can’t even pay?”

That’s a mistake. You can’t include your tax bills in your bankruptcy until two years after the initial filing. No return? No relief.

Keep in mind failing to file your tax returns can trigger a whole host of unpleasant consequences. Don’t conflate the return with the debt: one is paperwork, the other comes out of your bank account. And since failure-to-file penalties do carry financial consequences you can only grow your tax debt by dodging this crucial bit of business.

You can always get help.

If you’re staring at a scary tax situation and need help right away, call the Law Offices of Sadek Bankruptcy Law Offices. We offer free consultations, affordable payment plans, and an experienced team that will listen to your concerns and answer all your questions. Your financial fresh start could be just around the corner.
















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