Tax season approaches.
There’s a surprising degree of overlap between bankruptcy and tax I’ve found over three decades as a bankruptcy lawyer.
Here’s my two cents on what I know about taxes. It’s not a lot, but what I know is both simple and critical.
File those tax returns
Lots of folks who end up in my office discussing bankruptcy held off filing their returns because they figured they couldn’t pay the tax that would be due.
Bad decision.
Without a return, taxes never die
The IRS will not descend on you the week after you file a return with tax due but no check. They’re still opening envelops.
But filing a return gets all kinds of time periods running that may benefit you: the 3 years til the taxes are dischargeable in bankruptcy; the 10 years til the tax collection statute runs.
Whatever you do, don’t let the IRS file a tax return for you.
Don’t pay tax on discharged debt
If your debts were discharged in bankruptcy last year, that discharge has no tax consequences.
The Internal Revenue Code specifically excludes from taxable income any debts forgiven in bankruptcy.
Cancellation of debt is tax free
You may get a 1099 reporting the cancelled debt. The creditor whose debt is forgiven is required to do so.
It’s up to you to assert that there’s an exception to tax. And there’s an IRS form to rebut any tax consequences. Get it and file it.
Claim deductions for Chapter 13 payments
If you’re in a Chapter 13 that catches up arrearages on real property loans, claim those payments as deductions of your own. Just because the trustee writes the check, it’s still you paying the mortgage interest in that payment.
How to find and claim the deduction
The concept here goes beyond mortgage interest. If the expense was deductible had you written the check, it’s deductible if the trustee pays it.
Get the trustee’s disbursement records in your case from the trustee’s web site and get to deducting.
If you owe tax, fix your withholding
The return to be filed this spring can tell you if you are withholding enough money to pay your taxes.
If there’s a big number on the bottom line of the return for last year, and this year looks similar, increase your withholding now.
What Goldilocks knew about taxes
And if you think you can’t pay taxes as you go and support the rest of your living expenses, you need to look hard at the big picture.
It’s generally a poor decision to short the feds so you can pay AmEx or Visa.
Amend old returns if you missed something
If you missed a deduction or otherwise overpaid your taxes in a previous year, you have only three years to amend that return and claim a refund.
Time running out to claim prior year tax breaks
Lower income families often miss the fact that they get a tax credit (that’s real money, not just a deduction) under the Earned Income Tax Credit. Find out if you are eligible.
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Discharging taxes in bankruptcy
