Does filing bankruptcy affect your taxes? Filing taxes and bankruptcy can each be difficult and confusing on their own. Combining the two can lead to even more stress for debtors. Understanding the basics and knowing what to watch out for can help make this process much easier.
Filing taxes after bankruptcy is easy, and if you still have questions after doing research, you can always contact a bankruptcy attorney. While bankruptcy lawyers are essential to have on your side when filing for bankruptcy, they can also provide guidance after the fact.
An attorney can help if you have questions about handling your taxes after a bankruptcy filing. Although the internet is full of useful information on how to file your taxes after filing for bankruptcy, mistakes can negatively impact your tax return as well as your bankruptcy case. You will have different tax treatment depending on the type of bankruptcy you file, so always ask for assistance if in doubt.
Bankruptcy and Tax Debt
Receiving letters from the IRS regarding unpaid tax debts before filing for bankruptcy can be frightening. However, an automatic stay will be in effect once you file, which puts an end to IRS collection efforts.
It is possible for your tax debt to be discharged after you file for bankruptcy, but this depends on your personal circumstances and the type of bankruptcy you file. For example, income tax debt cannot be discharged in a Chapter 7 bankruptcy. To be eligible for a discharge, your income tax debt must not have accrued more than two years before filing, and the debt must have been assessed by the IRS within 240 days of filing for bankruptcy.
If the audit was performed after you filed your return, the IRS may consider your tax debt non-dischargeable, and other factors could also lead to the debt not being discharged. Speak with your attorney about your specific situation to better understand your options.
What Happens to Tax Debts Accrued After You File for Bankruptcy?
It can be detrimental to your case if you have already filed for bankruptcy and then accrue tax debt. The bankruptcy provision states that debtors cannot acquire new delinquent amounts while they are under court supervision. If you have tax debts that you are unable to pay after filing for bankruptcy, your case could be dismissed. This could happen if you file for Chapter 11 or Chapter 13.
What Happens to My Tax Refund?
Another factor to consider when filing taxes and dealing with bankruptcy is your tax refund. If you are expecting a substantial refund, you may want to wait to file for bankruptcy. Also, if you don’t receive your refund and haven’t spent it reasonably, your trustee may use the funds to pay your creditors.
If you plan on filing for bankruptcy soon, it’s a good idea to consult with an attorney before filing your taxes. They can provide guidance and help you better understand your options.
How to File Taxes After Bankruptcy
It’s important to ensure that you file the correct tax forms after you’ve filed for bankruptcy. The Bankruptcy Code requires that debtors file an individual tax return. If they fail to do so or request an extension, the bankruptcy case could be dismissed or converted. In most cases, filing taxes after bankruptcy is a similar procedure to before.
Additionally, it’s important to consider that you may receive a 1099-C Cancellation of Debt from a creditor following a discharge. A discharge or forgiveness of debt can be tax-deductible, and debts discharged through bankruptcy do not count towards income. To notify the IRS about the bankruptcy discharge, you’ll need to file an IRS Form 982 along with your taxes. Make sure to discuss any 1099s you receive with your tax advisor and/or attorney.
Tax Filing After Chapter 7
When you file for Chapter 7 bankruptcy, you will still be required to file a 1040 return as usual. However, in some cases, your trustee may need to file Form 1041 for bankruptcy estate. This form reports income earned by the bankruptcy estate, which may be necessary if the estate has generated income during the administration of the bankruptcy.
Tax Filing After Chapter 11
If you file for Chapter 11 bankruptcy, you will likely have retained control of your assets. This means that you will need to file both Form 1040 and Form 1041 when tax season comes around. Form 1041 reports any income generated by the bankruptcy estate during the bankruptcy proceedings.
Tax Filing After Chapter 13
Chapter 13 bankruptcy involves paying a portion of your debt to a trustee over a set period of time, usually three to five years. While you will still be assigned a trustee, you will need to file Form 1040 for your personal income taxes. As with Chapter 7, your trustee will file Form 1041 to report any income generated by the bankruptcy estate.
Does filing bankruptcy affect your taxes? This is a common question many people have when considering bankruptcy as a solution to their financial troubles. It’s important to note that while bankruptcy can discharge certain debts, it can still have an impact on your taxes. Therefore, it’s crucial to ensure that you file the correct tax forms after filing for bankruptcy. The Bankruptcy Code requires that debtors file an individual tax return, and there may be additional forms needed to report discharged debts.
So, if you’re asking “does filing bankruptcy affect your taxes?” remember to take the necessary steps to file correctly and seek advice from a tax professional or attorney.
Consult a Tax and Bankruptcy Professional Today
If you’re considering bankruptcy, it’s crucial to seek the guidance of a knowledgeable tax professional. At Tenina Law, we have the expertise to guide you through the complexities of the bankruptcy process and ensure that you’re meeting all of your tax filing obligations.
Contact us today to schedule a consultation and take the first step toward financial stability.
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