Are There Tax Implications To Bankruptcy?
It has been said that the only certainties in life are death and taxes. While death can’t be avoided, there are circumstances where certain taxes can be, or at least the amount of tax owed minimized. A frequently asked question about filing bankruptcy is how your tax status is impacted, or whether you can get out of paying taxes by seeking the protection of bankruptcy. These are good questions, and the answers are important to know if you are considering filing for bankruptcy.
While the IRS has certain rules about taxes, you can rest easy knowing simply filing for bankruptcy will not mean you owe more taxes than you would otherwise be required to pay. Other significant information about taxes and bankruptcy includes:
- If a debt is forgiven, the lender may send you a 1099 for the amount of the loan no longer due. This happens frequently when a home goes to short sale rather than foreclosure, because the lender considers the amount of your loan forgiven to be income. If you receive a 1099 in this situation, you will have to include it as income when you file taxes. However, if you have discharged the entire mortgage debt in a bankruptcy, you should not have to report any part of the mortgage loan not paid as part of your income.
- If you expect to receive a refund, you do have to report that to the Bankruptcy Trustee. It is possible that the refund may go to the Trustee rather than to you.
- If you have not filed taxes prior to filing bankruptcy you will have to provide a copy of your return, once it is filed, to the Court.
Taxes that you owe prior to or after filing will not be forgiven. Even in bankruptcy, you will be responsible for paying income taxes. However, the upside might be that by eliminating other debt you are now able to pay the taxes due, or can reach an agreement on payments with the IRS that fits your budget. To learn more about how bankruptcy and taxes interact, call our office.
For more information about taxes and bankruptcy, contact us at www.DsouzaLegalGroup.com. We will help by coming up with solutions that work for you.