Key elements affecting a tax refund during bankruptcy

As tax season approaches, many people have concerns. For those facing or contemplating bankruptcy, this may compound these concerns.

There are important things to understand about bankruptcy before making certain decisions. In regards to a tax return, consider some aspects that may have a strong effect on your tax return.

Timing

If you file for bankruptcy during tax season, the chances of the courts including your return in the bankruptcy increase. Also, tax returns that come in the midst of a bankruptcy will likely contribute to the bankruptcy.

If possible, it can be beneficial to file for bankruptcy after you receive and spend your tax return. However, you should not use the tax return to acquire new assets but rather to pay for daily living or to secure professional assistance.

Filing type

The type of bankruptcy you file is very important. In fact, it not only determines your taxable and nontaxable income and assets, but it also sets the parameters for the length of your bankruptcy. In regards to your tax return, the funds usually become an asset, and the type of bankruptcy determines how the court sees them and how the court will allow you to use them.

Protection precautions

Along with properties that are exempt from bankruptcy, there are also additional assets that may receive a full or partial exemption, and your tax return may be one of them. Particularly with a Chapter 7 bankruptcy, your tax return may become an asset and therefore receives exemption from the bankruptcy process.

However, if the amount of the return is larger than the allowed exemption amount, then only part of your tax return may be exempt, and the other portion will count towards the bankruptcy. Therefore, it may be beneficial to adjust your withholdings for your employment tax, which will decrease the amount of your refund. This may be helpful for other bankruptcy classes as well.

Understanding these key aspects can help you to make an educated decision about your tax return. It may also be helpful to review the applicable tax law in full.

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