Filing for bankruptcy can be an emotional and financially draining experience, but it can also provide a fresh start and a way to get your finances back on track. However, many people often forget about their tax obligations after filing for bankruptcy.
The good news is that filing your taxes after filing for bankruptcy is not complicated. In this blog, we’ll discuss the role filing for bankruptcy plays in filing annual income tax returns and address some common misconceptions.
The Impact of Bankruptcy on Tax Returns
Filing for bankruptcy can affect how you file your tax return since it could change your tax status. It’s important to note that filing for bankruptcy does not erase your tax obligations; you must still pay your taxes as usual.
However, some of your tax debts may be eligible for discharge in bankruptcy. Your bankruptcy lawyer will provide the guidance you need to ensure you’re fulfilling all your tax obligations while taking advantage of the benefits of bankruptcy.
Chapter 7 vs. Chapter 13 Bankruptcy
When filing for bankruptcy, you will likely file either a Chapter 7 or Chapter 13 bankruptcy. In general:
- Chapter 7 bankruptcy does not impact taxes since it focuses on liquidating assets to pay off debts.
- Chapter 13 bankruptcy will allow you to reduce and rearrange your debts over time through a payment plan, which could impact your tax refunds.
Discussing the impact of your chosen bankruptcy chapter with your lawyer will prepare you for what to expect from your taxes after filing for bankruptcy.
Reporting Income in the Year of Bankruptcy
When you file for bankruptcy, all income earned during that year must be reported on your tax return, including any income earned before filing for bankruptcy. As such, consulting with an experienced tax professional or lawyer after or before filing for bankruptcy will provide you with the necessary advice to ensure that you file your taxes correctly.
Claims for Refundable Tax Credits or Deductions
When filing for bankruptcy, you may be able to claim certain tax credits, including the earned income tax credit (EITC) or child tax credit and other deductions. However, you can lose these credits and deductions if your bankruptcy proceedings are initiated after you file your tax return. Your bankruptcy lawyer will advise you on the most effective way to claim these credits and deductions and ensure you’re not losing any benefits.
The Need for Expert Guidance
Although there is a ton of information available online about filing your taxes after filing for bankruptcy, it can still be overwhelming and stressful, especially when you’re already dealing with bankruptcy proceedings. The best way to navigate this issue is with the expert guidance of a bankruptcy lawyer who can help you understand the nuances of bankruptcy and tax laws. Your lawyer will ensure that all necessary documentation is in place and that you’re filing your taxes correctly.
Speak to Our California Bankruptcy Team
Filing your taxes after filing for bankruptcy may seem complicated, but with an expert bankruptcy lawyer by your side, it doesn’t have to be. Tax and bankruptcy law are constantly evolving, so it’s crucial to have an experienced professional who can guide you through the process. With the correct guidance, you’ll avoid any negative impacts on your tax return and bankruptcy proceedings.
Let Resnik Hayes Moradi LLP help you through every step of the bankruptcy process. Call now at (213) 344-0043 or set up your risk-free consultation here.