Northern California Bankruptcy Lawyer

On The Bankruptcy Soapbox

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Time Running Out To Claim Prior Year Tax Breaks

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hourglass-23654_1280Time is running out on your 2011 tax return.

Whaaaat?, you say.  You’re working on 2014 between now and April 15th.

But if you’re one of those people who overlooked a tax deduction or, better yet, a tax credit like EITC, you’re running out of time to amend your 2011 return and capture some of that money.

An amended return must be filed within three years of the date you filed the original return or within two years of when you paid the tax.

Fix your tax glitches

Tax law allows you to amend returns when you’ve discovered an error, that’s not math related. (If it’s just math, the IRS will fix it without an amendment.)

I’ve written lots  about overlooked tax deductions and credits.

Remember that you can not only do better with this year’s return, you have the right to go back to the last three tax years to claim money you left on the table in prior years.  But the IRS may correct your math blunders, but it won’t claim overlooked deductions or credits for you.

Overlooked tax savings

The biggest missed deductions for my bankruptcy clients are mortgage interest and taxes paid through a Chapter 13 plan.

My client last week had paid $65,000 in mortgage interest through his Chapter 13 plan over 5 years, but hadn’t claimed it on his taxes.  And come April 15th, he’ll lose the chance to go back to the 2011 return and claim the deduction, and the reduction in tax the deduction brings with it.

Property taxes and state income taxes, if paid through a Chapter 13 plan, ought to be equally deductible.

And if your Chapter 13 took care of business debts or payroll or sales taxes, those may be deductible business expenses.

Deductions vs. credits

We talk loosely about “writing off” certain expenses on our taxes.  That’s short hand (or short-speak) for a deduction.

A deduction reduces the amount of income on which our taxes are figured.  Less income, less tax.

But better than a deduction is a credit.  A tax credit is like a preloaded credit card.  It’s a dollar for dollar reduction in the actual tax you owe.

Which brings me to the Earned Income Tax Credit, money available for the claiming, by low and moderate income families.

Earned Income Tax Credit

This is one of the very few tax breaks that go to low income Americans;  studies show most tax breaks go to the very rich (but that’s another post).

We’re talking real money here:  the smallest credit for a single person with no children is $496;  the largest, for a family with three or more children is $6,143.

A family with three or more children can claim the credit for 2014  even if their income was $52,427.  And you don’t have to have children to get the credit if you are over 25, not claimed as a dependent by another taxpayer, and made less than $14,590.

Here’s the IRS EITC page with links and more detail about who qualifies and how to claim the credit.

The IRS has instructions on how to claim the credit for past years, including links to the earnings caps for 2011, 2012, and 2013.

The United Way’s EarnItKeepItSaveIt program helps taxpayers, for free, file to claim the credit.

Only days left

You lose out on a refund or a tax credit for 2011 if you don’t amend your return in time.  The time, as I calculate it, is April 15, 2015.

So if you left money on the table for prior tax years, get moving and get an amended return, or an original return on file, in time to get your money back.

 

Image in the public domain courtesy of Nemo and Pixabay.

Why Tax Software Is Lousy Purchase

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5930176734_380196d14c_zWhy pay for Turbo Tax or its competitors when, odds are, you can get it for free?

Unless you like burning money.

Seventy percent of American taxpayers qualify for free tax software.

If your income was $62,000 last year or less, you can use commercial tax filing software for free through the IRS FreeFile program.

Software is free, filing the return is free, and direct deposit of your refund is free.

Did I mention it was free?

Filing state tax returns

Some twenty states participate in the FreeFile, too.  Find your state from this map.

California, where I live, hasn’t joined FreeFile, but has its own, free on line tax filing service.

Need tax help?

If you have trouble doing your taxes on your own, there’s free help with your return, too.

Trained volunteers help those with low incomes, disabilities or limited English through VITA, Volunteers Income Tax Assistance.  Find a VITA site near you.

AARP also runs free tax assistance programs for low to moderate income tax payers called Tax Counseling for the Elderly.  They’re everywhere, too.

And then there’s the United Way’s EarnItKeepItSaveIt tax help program.  Free tax help, focused on helping low income individuals and families claim the Earned Income Tax Credit.

Through the EITC you can not only get a refund of the taxes you’ve paid during the year, but get an additional credit, payable in cash, depending on the composition of your family.

Find a Bay Area EarnItKeepItSaveIt program

Don’t burn money: get help and maybe even a refund on your taxes.

Image: taxrebate.org.uk

How To Wipe Out Tax Penalties In Bankruptcy

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217/365 August 5 - Found MoneyTax penalties seem like a further insult when you’re having trouble paying the tax itself.

Everything seems subject to an additional penalty:  failure to file timely;  failure to pre pay sufficiently;  failure to be accurate.

They mount up quickly, often equaling the unpaid tax.

Bankruptcy can not only eliminate your liability for certain taxes, it can wipe out the tax penalties as well.

Here’s how it works.

Three rules for discharging tax penalties

Penalties for dischargeable taxes are dischargeable

Tax penalties are tied to a particular tax year.  If the tax for that year is dischargeable in bankruptcy, the discharge wipes out the penalties too.

The formula for a dischargeable tax, roughly speaking, says you can get rid of an unsecured tax if  1) the return for that year was due more than three years before the bankruptcy was filed;  2) if the return wasn’t filed on time, it’s been on file for at least two years; and 3) the tax for that year was assessed at least 240 days before bankruptcy.

Discharge the tax, discharge the penalty.

Penalties tied to events more than three years before filing are dischargeable

If the failure that triggered the penalty happened more than three years before filing, the penalty is dischargeable.

It’s dischargeable even if the the tax for that year isn’t dischargeable, for instance, because the returns weren’t filed on time. see 11 U.S.C. 523(a)(7).

All tax penalties wiped out in Chapter 13

That’s right:  all tax penalties are discharged by a Chapter 13 discharge.  Hard to beat, right?

Chapter 13 requires that you pay in full the priority taxes and the interest that accrued up to the date the bankruptcy case was filed.  But at the end of the case, all tax penalties are wiped out, even on the priority taxes.  More on taxes in Chapter 13.

Fraught with rules

So much of discharging taxes depends on knowing the maze of rules that apply to taxes in bankruptcy.  It’s critical to get a tax transcript to verify the dates of all the important transactions.

Get experienced legal help if you want to discharge taxes and tax penalties.  This is not the time or place for the cheapest or closest bankruptcy lawyer in town.

Image courtesy Flickr and Sharon Drummond

Tax Question Roundup

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soapboxNot long til tax returns are due.

Time for a roundup of tax issues I see from atop my soapbox.

I’ll point you to fuller discussions of tax topics.

Are Chapter 13 payments deductible?  

I’ve never seen a claim that the entire monthly payment is deductible.  In a case where all of the debts were business debts, it might be possible.  But distributions by the trustee on debts like taxes or mortgage interest that were  deductible outside of bankruptcy should be deductible.

Do I have to include amounts on 1099’s I got?  

Since the IRS got a copy of every 1099 that you got, you can’t ignore them.  But 1099’s don’t necessarily mean more tax.

Should I request an extension if I can’t pay what I’ll owe?  

The law allows you to avoid penalties for late filing if you request an extension of time to file.  The interest clock on taxes you owe doesn’t stop, however.

Are property taxes a priority for payment when money’s tight?  

I can only speak authoritatively for California:  here, the property owner has no personal liability for the tax.

Property taxes are a charge on the property, however.  The county’s lien is senior to the mortgage lender’s lien.

Taxes have to be at least five years delinquent before the county will consider a sale of property for unpaid taxes.

And most likely, your mortgage lender will advance the money to pay property taxes rather than risk a tax sale.

Can I get rid of taxes in bankruptcy?  

I thought you’d never ask!  Yes, income taxes for which an honest return was filed and sufficient time has run (roughly three years from when the return was due) are dischargeable in bankruptcy.

The discharge of taxes has lots of twists and turns, so you need careful bankruptcy advice, but bankruptcy will eliminate the personal liability for income taxes.

Foreclosure And The Tax That Follows: What You Must Know

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dollar-163473_1280The homeowner did the right thing:  faced with the threat of foreclosure, he called his tax professional in advance.

He did the right thing that nearly produced the exceedingly wrong result.

Because the tax pro asked the wrong question and  got the wrong result.

The illusion of professional advice about taxation upon foreclosure almost cost my client a bundle.

Once we dispelled the illusion and got to the real law, an emergency bankruptcy filing was in order.

Cancelled debt treated as income

The standard tax rule is that debt that is forgiven, settled or cancelled triggers potentially taxable income to the person who owed a debt.

The IRS recognizes at least two exceptions to the inclusion of cancelled debt in the taxpayer’s income:  insolvency and bankruptcy.

When the client decided to let his rental property go to foreclosure, he called his accountant about the tax issue.

The accountant asked him if his debts exceeded the value of his assets.

The client’s affirmative answer produced a “don’t worry” about cancellation of debt income from the accountant:  “You are protected by the insolvency exception to taxation.”

Only the  DIY analysis was defective.

Insolvency isn’t so simple

Trust the IRS to have a test for insolvency that isn’t the same as the usual test.

The IRS’s insolvency test in these circumstances includes retirement assets usually excluded from balance sheets.

It isn’t just the obvious assets that are included.  Retirement funds, including classic pensions and disability payments are certainly not  “assets” a layman can be relied on to recognize.

This  client had a comfortable disability income and, had he accepted the  reassurances of his tax professional, Monday’s foreclosure would have yielded a hefty tax bill.

Bankruptcy shields filer from that tax

Instead, we’ll be filing a bankruptcy case, since discharge in a case under Title 11 (bankruptcy) is the other, often invoked exception to inclusion of forgiven debt in income.

The discharge in bankruptcy provision only works if the bankruptcy filing occurs before the foreclosure or short sale.  There’s no retroactive application of the bankruptcy king’s X.

Had my client relied on the accountant’s call and let the foreclosure proceed before filing bankruptcy, the tax would have landed on his return.

And once the personal liability for the mortgage debt is discharged in bankruptcy, it doesn’t matter how much time elapses before the eventual foreclosure or sale.  The subsequent foreclosure doesn’t forgive any debt:  the borrower’s personal liability was forgiven long ago, by the bankruptcy.

Morale of this tale:  question any tax professional who gives you a quick answer that no tax results without real analysis.

More on taxes on foreclosure.

Disputing the erroneous 1099

Image courtesy of  Pixabay and PublicDomainPictures.

 

California Bankruptcy Lawyer Puts Information Out There – Too Bad He’s Wrong On The Basics

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I applaud attorneys who make sound information about bankruptcy available to the public.  My only requirement is that their information be true.

The truth is income taxes are dischargeable in bankruptcy if 3 reasonably simple conditions are met;  debts to the government are generally dischargeable in bankruptcy.

Please reread that line, and get that bit of law in your head.

Because you wouldn’t know the truth of the statement above from reading the blog of this lawyer (who puts himself forward as an expert on bankruptcy law) whose opening line is utterly and absolutely wrong on the law.

Is Vincent Howard of Orange County  really giving this information out to his clients? I surely hope not. [Read more…]

What’s Up The Day After Tax Day

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The tax extension in the mail and you don’t have to think about income taxes til October 15th approaches.  Right?

Not in my book, if you are self employed.

The self employed don’t have their estimated income taxes withheld from their paychecks.  There aren’t any paychecks if you are among that resolute band of entrepreneurs, small business folk, and independent professionals.

You are expected to make quarterly tax deposits throughout the year toward the current year’s taxes.

But as I asked bankruptcy clients over the past couple of months about the status of their tax return, I saw a pattern in those who expected to ask for an extension of time to file the return.

Almost always, they were putting off making tax deposits for this year until their tax professional calculated the right amount.  They were not only extending the time to file last year’s return, they were postponing advance payment for this year’s taxes.

Courting tax trouble

The light at the end of the tunnel is the approaching express train.

Put off beginning to provide for this year’s taxes, waiting for a precise calculation, and you set yourself up for a tax casualty.  You may be short come next spring’s tax season.

In a perfect world, you don’t want to pay more taxes into Uncle Sam’s holding than necessary.  But in my experience, the longer you delay beginning to pay, the more likely you can’t pay when you reach year’s end.

I’ve even advocated ditching quarterly tax deposits in favor of monthly tax deposits.

No harm, no foul

Here’s my proposition for those on extension:  deposit at least one quarter of the taxes from the last filed return in April, and each quarter thereafter until your accountant calculates more precisely what is required for this year.

If that turns out to be more than a quarter of your estimated liability for the current year, you can even it out in the later quarters by reducing your deposits.

If you find you’ll owe more taxes this year than you did two year’s ago, you’ve at least gotten a start toward paying.  You’ll have to make larger deposits in later quarters to avoid penalties for being under withheld.

But that beats confronting a larger-than-expected tax debt without having made any provisions for payment.

Being self employed is a heady proposition, as long as the heady feeling isn’t oxygen deprivation when you learn you owe a fistful of taxes, for which you’ve made no provision.

Image courtesy of complexify.

Skip Filing Your Tax Return And The Tax Lives Forever

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Tax Myth Saddles You WIth Tax ForeverIt’s tax season and tax myths are everywhere.  Know what the most dangerous one is?

If you can’t pay the tax on the return, you’ll escape collection action if you keep a low profile by not filing the return.

I hear it repeatedly, each year, year after year.  And it’s wrong, over and over.

Four counts of wrong

First, I’ve seen no evidence that the IRS leaps immediately to chase taxpayers whose filed return shows an unpaid liability.  In fact there’s a right to an installment agreement if your unpaid tax is $5,000 or less.

Second,  failing to file the return on time triggers a tax penalty separate from the penalty for not paying on time.  There are two penalties in play here:  a penalty for not filing and a different penalty for not paying.

Third, duck the requirement to file, and somehow you’ve given yourself permission to keep putting it off.  And of course, now that you are late, you have penalties added to the liability and the interest clock is ticking.

But most importantly to a bankruptcy lawyer is that you cannot ever discharge the tax debt in bankruptcy if the return is not filed.

Discharging tax in bankruptcy

Bankruptcy law sorts tax debts into three piles:

  1. taxes secured by a lien
  2. taxes that survive a bankruptcy
  3. taxes dischargeable without payment

If you’ve got tax troubles, you obviously want your obligations to fall in that third pile, the dischargeable taxes.  Care to guess what the factor that determines dischargeability?  The length of time the return has been on file.

The rule, simplified a bit, is:  taxes are dischargeable in bankruptcy if they relate to a tax year whose return was due more than three years before bankruptcy; for which the return, if not filed on time, has been on file for two years; and the taxes for that year were assessed more than 240 days before filing.

So, you can’t begin to consider wiping out tax debt if you don’t file the return and that return needs a certain degree of aging before discharge is possible.

Bankruptcy is not the first choice of ways to resolve tax troubles, but bankruptcy can eliminate tax debt if it comes to that.

But not if you follow the myth that you don’t file the return until you can pay the tax.

Image courtesy of wikimedia.org

Bankruptcy Alphabet: I Is For IRS

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“I” stands for IRS in my Bankruptcy Alphabet. Bankruptcy law treats the IRS little different  than other creditors.  The tax collector is just one of the boys.

But the most important point is that income taxes can be erased in bankruptcy.  There are rules, three of them in fact, that govern when income taxes can be discharged:

  1. The return for the tax must have been due, including extensions, more than 3 years before the filing.
  2. If the return was not filed on time, it must have been filed more than 2 years before the filing.
  3. The tax must have been assessed by the IRS more than 240 days before filing.

The IRS must respect the automatic stay. When a bankruptcy case is filed, all creditors, including the feds, must stop all efforts to collect.  The IRS  must lift garnishments.

There are a couple of exceptions:  the IRS can assess taxes after the filing without violating the stay and they can audit tax returns.  But collect they can not.

Taxes for recent years get a priority for payment in bankruptcy.  If the trustee gathers up money for creditors, the priority taxes are paid in full before general, unsecured creditors get anything.

If a tax is dischargeable, the penalties associated with that tax get discharged as well.

Each of these rules applies to state income taxes as well.

Part of the appeal of Chapter 13 to me is that priority taxes, that can’t be discharged, can be paid over time, without interest and the penalties discharged!  Sweet deal.  And IRS liens, which cover everything a taxpayer owns, can be paid to the extent they attach to something with value, and stripped to the extent there is no value for the lien to attach to.

In this day of epidemic foreclosures, know that a foreclosure or short sale after filing your case  immunizes the homeowner from cancellation of debt income under Internal Revenue Code 108.  A discharge of a debt in a case under Title 11  does not produce a tax debt.

In bankruptcy attorney Jay Fleischman’s world, and his alphabet, I is for Income.

Image courtesy of takomabibelot.

Why Credit Cards Win Clash of Titans

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Credit cards vanquish tax collectorIn the tug o war of which creditor to pay, why is it that credit cards win over taxes and child support?

I’m accustomed to clients who pay creditors rather than provide for their own health care, emergency fund, or retirement. That’s taking care of commitments to others before self.

But I haven’t figured out why embattled debtors choose to pay the credit card collectors instead of child support and taxes. Yet that was just what this week’s client had done: $10,000 in taxes and $24,000 in support for a child went unpaid, while he chipped away at credit card debt.

To a bankruptcy lawyer, this is insane, since both family support and recent income taxes are priority claims, not dischargeable in bankruptcy.

To an outsider, it’s still insane, since the IRS can simply take all the money in your bank account, without suing you first. And your child is dependent and yours, not to mention that failure to pay child support is the one debt that can get you jailed.

Those are the creditors to fear.

I have two theories of why people choose to pay credit cards instead of taxes or support.

  1. Terror of the Telephone: the credit card companies call, and call, and call if you don’t pay. They invade your personal space at home, and they confront you with your financial shortcomings incessantly. It’s hard on the nerves and the ego.
  2. Credit Report Obsession: fixated on credit reports and credit scores, clients focus on the immediate “damage” that credit card delinquencies can inflict, and set aside the more lasting damage that tax liens and wage intercepts can cause if you ignore the feds and the child support authorities.

Credit card companies can’t take your money without suing you first, so they have to use fear and shame to get you to distort priorities and pay them first.

We need to get that word out.

Who to pay when you can’t pay everyone

Debts that don’t go away in bankruptcy

Image licensed under Creative Commons, courtesy of Javier Kohen.

 

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Redwood City, CA 94063
Phone: (650) 694-4700

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