It's pretty well-known that tax debts typically can't be discharged in bankruptcy. But what if you're getting a refund? This article answers some of the frequently asked questions about tax refunds and bankruptcy.
Written by Attorney Andrea Wimmer.
Updated October 30, 2020
I don't know how much my tax refund for this year will be, what should I do.
If you've been getting approximately the same amount of refund for the last few years and you haven't had any major life changes, such as getting married, having a child, buying or selling a house, or getting a new job, then it's ok to estimate your refund for this year based on that number. If your refund is different every year, or you have no idea how much you might receive, find a free tax refund calculator online to get an estimate.
Why do I have to list my tax refund if I won't get it until next year?
Your Form 106A/B (Schedule A/B) has to list all property (called assets) that you own or have any interest in at the time your bankruptcy case is filed. While you're not getting your refund until you file your tax return the following year, as of the filing date, you're already entitled to a portion of the refund you'll be getting. After all, you've been paying taxes all year long.
Are all tax refunds protected in a bankruptcy?
No, there is no general rule that all tax refunds are protected. You can only protect your tax refund if the exemption law you're using has a specific tax refund exemption you can claim, or if there is a wildcard exemption you can use.
Federal bankruptcy exemptions have a pretty generous wildcard, so folks using the federal exemptions can typically protect their tax refund in full. Some states provide exemptions that protect tax refunds that are the result of a specific tax credit, like the Earned Income Tax Credit or the Child and Dependent Care Tax Credit. Some states, like Arizona, don't have any protection for tax refunds or a wildcard exemption.
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What happens if I don't list my tax refund?
If you don't list your estimated tax refund as an asset on your Schedule A/B, you can't protect your refund by claiming an exemption for it on your Form 106C (Schedule C). If an asset, including a tax refund, is not claimed as exempt on Schedule C, the trustee handling the case will take a portion of the refund and use the money to pay unsecured creditors.
The trustee says I have to amend my forms to list my refund. What should I do?
Since you can only protect your refund with an exemption if you list it, you should amend (update) your Schedule A/B to list your tax refund as an asset, and amend your Schedule C to claim all available exemptions. If no exemptions are available to protect your refund, you only have to amend your Schedule A/B.
If you’re an Upsolve user and need instructions on how to use our free web app to prepare your amendment, please visit help.upsolve.org and use the "Submit a Request" feature in the top right corner to send us a message.
Will the bankruptcy trustee take my whole refund?
No, the trustee can only take the portion of your refund that can be traced back to before your case was filed. So, if someone files on March 30, the trustee can only take 1/4 of the refund. That's because as of March 30, there are three quarters left in the year, so the pre-filing portion of the refund is only 1/4. The later in the calendar year a bankruptcy case is filed, the greater the percentage of the tax refund that is an asset of the estate. If someone files on September 30, for example, three quarters of their refund are considered part of their bankruptcy estate and will be paid to their creditors by the trustee.
Can I just wait until the new year to file my bankruptcy to protect my refund?
No. If you file bankruptcy at the beginning of January, or any time before you receive your refund in the new year, then the trustee can take 100% of your tax refund. That's because you were entitled to the full refund when your bankruptcy case was filed.
How will the trustee know how much my refund was?
As part of your duties as a debtor in bankruptcy you have to provide your trustee with a copy of your tax return once it's been filed. The trustee will use the refund information on your tax return to calculate the pre-filing portion of your refund. While there is nothing that says you have to file your taxes before Tax Day, the trustee can't close your case until they get a copy of your return. The sooner you get your taxes filed and a copy of the return sent to your trustee, the better.