Your Intro To Taxes And Bankruptcy
If you're about to declare bankruptcy, you're not alone. Bankruptcy is far more common than many people realize, and chances are there are a couple of people you know who have had to go the bankruptcy route as well. However, that doesn't mean that the process is easy. It is relatively simple when you see everything you have to do, but when you're first starting out, it can be confusing, especially in relation to your taxes.
Your Return Might Be at Stake
Your tax return might be something that your creditors want. Nolo.com notes that it generally comes down to whether you earned the money that was taxes before or after your filing; for example, if you filed for bankruptcy in December of 2018, and in 2020 you know you'll get a refund from your 2019 income, that refund is yours. However, the refund you get in 2019 for your 2018 income will likely be taken by the trustee overseeing your bankruptcy.
You Won't Owe Tax on the Discharged Debt
Bankruptcy is supposed to put your debts into a specific phase -- either the debts are discharged and gone, or you're still paying some of them down as part of a payment plan, with the rest gone. The debts that are gone are not taxable, at least as of early 2019. That could always change, however, if another tax law is passed. This is something you should double-check with your bankruptcy attorney when you file.
Believe it or not, a business bankruptcy may give you some deductible expenses, such as filing fees. Personal bankruptcies do not give you that benefit, unfortunately.
You'll Have to Stay on Top of Tax Filing
Note that once you file for bankruptcy, especially if your discharged debts include much older back taxes (taxes from more recent years are usually not dischargeable), you will have to be very, very good about filing your taxes, paying on time, paying estimated taxes if applicable, and so on. The IRS does understand that sometimes people have to declare bankruptcy; they just want to see that you're making your financial situation better now that you've gotten rid of those debts.
Your bankruptcy attorney (because you should never, ever file on your own) can guide you through the filing process, but a tax attorney can help you with potential business deductions and other effects of the filing. When you're about to file taxes after you've declared bankruptcy, it would help to meet with a tax attorney and be sure you haven't missed any potential benefits.