Tax Refunds and Bankruptcy Exemptions

Any tax refund a person is owed at the time their bankruptcy case is filed with the court is part of the bankruptcy estate. This is true even if you won’t get the refund for months. This can be a bit confusing, so there’s already quite a bit of information in the Learning Center about this. 

Since this article is specifically about which states do (or don’t) protect tax refunds with an exemption, be sure to check out What Happens to Your Tax Refund in Bankruptcy? and Frequently Asked Questions About Bankruptcy and Tax Refunds for more on that.

Exemptions in a Nutshell

Exemptions are laws that protect your property interests. If you’re able to claim an exemption to protect your tax refund, you’ll be able to keep the refund. In that case, and depending on when your bankruptcy case is filed, the trustee may not even keep your case open until your tax return is filed. 

Federal Bankruptcy Exemptions

The federal bankruptcy exemptions don’t contain a specific provision protecting tax refunds. But, especially for folks who don’t own a home, the wildcard exemption is typically generous enough to protect an expected tax refund. As a result, this article includes information specific to opt-out states where filers can’t use the federal bankruptcy exemptions. 

Wildcard Exemptions in a Nutshell

A wildcard exemption protects whatever kind of property you want to protect. Generally, this includes expected tax refunds. But not all states have wildcard exemptions. 

States With No Protection for Tax Refunds

Some states don’t have a wildcard exemption or a specific exemption for a tax refund. In these states, trustees can collect the pre-filing portion of your tax refund (check out the FAQ article to learn what that means exactly) and use it to pay down your unsecured creditors. These states are: 

• Arizona

• Montana

• Utah

• Wyoming

If you live in one of these states, consider calling your state legislature and asking that they adopt a tax refund (or wildcard) exemption. It probably won’t happen quickly enough to help in your case, but it can help others in your position in the future.  

States That Protect Only Certain Tax Credits

Some states provide an exemption for tax credits, most commonly the Earned Income Tax Credit and/or the Child and Dependent Care Tax Credit. The states that have an exemption to protect tax credits are as follows: 

Earned Income Tax Credit Only

• Alabama

• Florida

• Idaho

• Kansas

• Louisiana

• Mississippi (federal and state; $5,000 limit for each)

• Missouri

• Nebraska

• Nevada

• Ohio

• Oklahoma

Earned Income Tax Credit & Child and Dependent Care Tax Credit

• Colorado

• Illinois

• Virginia

If you’re in an opt-out state that's not listed here, then there's no specific tax refund/tax credit exemption. You may be able to use a wildcard exemption if one is available to protect your refund. This definition of "wildcard exemption" includes a list of all states that have one.

Let’s Summarize…

Tax refunds can be tricky as timing often plays a major role in determining how much — if anything — your creditors may get from your tax refund. If you rely on your tax refund to catch up on bills or major purchases every year, make sure you understand how tax refunds are treated in bankruptcy and whether all or a part of your refund may be at risk if you file.