Bankruptcy is a legal status of an organization or a person who is unable to repay his or her depth that they may owe other creditors. In various jurisdictions, a court will impose bankruptcy order. When it comes to filing your taxes, you should make sure that there are some few things you take care of. Chapter 7 bankruptcy and filing taxes requires a debtor to request an extension or file individual tax returns. There are various types of bankruptcy and each type will have its own way of affecting your taxes. However, bankruptcy has one benefit in that your discharged debt do not have an impact on your taxes since it is not included in the taxable income. Having knowledge on the kind of tax consequence a bankruptcy may cause is essential in deciding whether bankruptcy will be a good option for you.
Chapter 7 bankruptcy has two estates. The bankruptcy estate and the individual estate, in any case you file a bankruptcy petition with your spouse, they will both be handled by a trustee and every estate is handled separately for the purpose of tax.
Bankruptcy Estate
The trustees who manage bankruptcy estate take the responsibility of filing and preparing income tax returns that belong to these estates. At the time when your case is closed, all the remaining assets are returned to you with no tax consequences following it.
Chapter 7 Individual Filer
When you declare chapter 7 bankruptcy and filing taxes, you will be required to send your individual tax returns although you won’t include any deduction, income or credits from a different bankruptcy estate. You are also allowed to terminate your tax year just a day before you file your bankruptcy. If there was any tax due at that time, it will be treated as a claim against your bankruptcy estate. It is also possible for you to pay the due taxes after you have filed although all the income you will be earning for the rest of the year will be filed for another return.
Payment of Tax Claims
Chapter 7 bankruptcy doesn’t allow IRS to take your property or money so as to pay income taxes if the taxes became due just three years after you had filed for bankruptcy. IRS can only file a claim of proof for the taxes; any claim is paid from the bankruptcy assets. Tax claims that are three years old from the date of your bankruptcy can be terminated in accordance with chapter 7.
Tax Attributes Deduction
Certain credits and deductions can be reduced when you use the amount of discharged debt excluded from the income. These excluded discharge debt are known as tax attributes. Reduction for tax attributes is made on the basis of tax returns in bankruptcy estate when filed under chapter 7.
Conclusion
Making a good decision on whether to file for bankruptcy is hard because many people lack the knowledge for possible effects it may come with. Contact Jed Shaw today at 713-750-9038F for more advice.