After years of dedicating our work to bankruptcy cases in California, we have gathered extensive knowledge to help our clients who are considering bankruptcy, are currently going through the process of bankruptcy, or have already finalized their bankruptcy. One of the common questions we receive from clients is how to file taxes correctly after you have filed for bankruptcy. With tax season coming to a close, the following are a few tips to consider when juggling bankruptcy and taxes:
- File Your Tax Return: While it may be tempting to not file your taxes because you know you will not be able to pay any taxes that you owe, this will actually work against you. Even if you are not able to pay anything, you should always file your taxes. Why you ask? Because when you file your tax return it starts several clocks that could work to your advantage. For example, you have three years from your filing date until discharge. The tax collection statute, however, is 10 years. The sooner you file, the sooner these time limits will take effect. Besides, if you do not file a tax return, the IRS will file one for you eventually and you do not want that to happen. The end result of an IRS filed tax return is never good.
- Do Not Pay Taxes on Debts That Were Discharged: If you went through bankruptcy, you are likely to have discharged debts. There are no tax consequences for these debts. The IRS code is specific on its exclusion of taxable income when it comes to debts and bankruptcy. You may still get a 1099 from a creditor who cancelled the debt, but you must assert that your debt is part of a bankruptcy exemption.
- Claim Deductions for Chapter 13 Payments: If you are making payments for a Chapter 13 bankruptcy to catch up on real property loans, you are allowed to claim those payments as deductions. You will, however, need the bankruptcy trustee’s payment records to find out exactly what you can deduct. Your tax professional or one of the attorneys at our office can help you understand those deductions.
- If You Owe Taxes, Changes Need to be Made: If you file your taxes and owe money, you need to change the amount you are withholding from your paycheck. Your employer should be withholding the correct amount of money that keeps you from owing anything at the end of the year. If you get a huge refund, you may also want to make changes so you will have access to some of that money throughout the year.
Contact an Experienced Bankruptcy Attorney Today
If you have already filed for bankruptcy or are considering doing so, we urge you to contact an experienced attorney to help guide you through the process. The attorneys at Bankruptcy Law Center serve the San Diego, Vista, and Los Angeles areas and can answer any questions that you might have. Contact one of our conveniently located offices to schedule a consultation today.
(image courtesy of Brandon Day)