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Did You File for Bankruptcy in 2018? Here Is How It Affects Your Tax Return

So, you made the decision to reclaim your life from financial trouble in 2018 and file for bankruptcy.  When you file, you basically separate from your estate.  You can think of your estate as a separate person.  This can create some complexities during tax season.  To add more into the mix, the chapter under which you file can change things!  Read on to learn more about the fun of taxes after bankruptcy!

Taxes After Chapter 7

If you utilize bankruptcy under chapter 7, you will face certain limitations with regard to tax debt.  For example, you can only discharge income tax.  You cannot discharge tax debt that is more than three years old.  Also, the tax return associated with the debt cannot have been filed more than two years before the bankruptcy.  In addition to the afore mentioned stipulations:

  • The tax return must not have been filed by the IRS. This is what is called a “substitute return” and debt created by this return cannot be forgiven during bankruptcy;
  • Only taxes that were assessed within 240 days of bankruptcy can be forgiven;
  • The debtor cannot have a previous conviction of tax evasion or fraud.

Taxes After Chapter 11

A bankruptcy court will take a look at your current tax situation as well as the situation you will be in for the foreseeable future.  If the court does not believe you can handle your tax situation, they will reject your bankruptcy filing under chapter 11 and force you to convert to chapter 7.  In addition to this tax consideration, those who file under chapter 11 must be able to shoulder the burden of capital gains resulting from property sold.

Taxes After Chapter 13

Remember, people who file under chapter 13 must forward all disposable income into an account meant to pay off debt and controlled by a trustee.  If your tax return was not figured into the calculations done when filing for bankruptcy, the refund is considered disposable and must be forwarded to the trustee.  If your expenses have changed, you can petition the court to give you all or part of you refund to put toward the new expenses.  This process is called “excusing a refund”.  To do this, you must:

  • Tell the court how much you need;
  • Inform the court of which refund you are petitioning to excuse;
  • Specify why you need the refund excused (wholly or partially).

Taxes are confusing without the addition of bankruptcy, but sometimes a complex problem requires a complex solution.  If you are considering bankruptcy, contact Elias Dsouza.  He has the knowledge and experience to guide you through bankruptcy.

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