The Effect of Bankruptcy on Filing Income Taxes
All over the country people seek out relief from the United States bankruptcy laws to overcome debts that have become too big for them to handle.
One question many people seeking relief through bankruptcy have is whether or not debts discharged in bankruptcy are income on tax returns? The simple answer to that is generally No.
Creditors may send you a Form 1099, but this does not mean that the amount must be included as income.
If a creditor forgives a debt outside of Bankruptcy, then it may be required to be included as income, however under Internal Revenue Code Section 108 debts forgiven in Bankruptcy are NOT included as income.
This is a critical distinction.
Especially if you have decided to negotiate directly with your credit card companies.
After you have missed a number of payments the credit card company may settle with you.
This means that they will allow you to pay a percentage of the debt and they will forgive the rest.
The problem is this forgiven debt becomes income and you will have to pay taxes on it.
Thus, the benefit of Bankruptcy is that the discharged debt does not have any real impact on taxes since it is not included as taxable income.
However, this does not mean that there may not be other consequences.
You may not be able to take certain tax credits and deductions you might otherwise have been able to if you had not filed.
The amount discharged may be required to reduce any tax attributes, such as operating losses, capital loss carry-forwards, basis reductions, and others.
It is important to discuss these issues along with the impact of filing Bankruptcy with your accountant.
To ensure that you don't need to pay taxes on discharged debt in Bankruptcy and to properly allocate any tax attributes, make sure to file IRS Form 982 for the tax year in which you received your Bankruptcy discharge.
Always remember that although an Automatic Stay goes into effect as soon as you file for Bankruptcy, it does not stop the IRS from: 1.
Auditing you 2.
Demanding you file tax returns 3.
Sending you a notice of tax deficiency 4.
Making tax assessments and issuing of a notice and demand for payment of assessments.
With any legal matter it is important to seek out legal counsel that is going walk you step by step through the process.
One question many people seeking relief through bankruptcy have is whether or not debts discharged in bankruptcy are income on tax returns? The simple answer to that is generally No.
Creditors may send you a Form 1099, but this does not mean that the amount must be included as income.
If a creditor forgives a debt outside of Bankruptcy, then it may be required to be included as income, however under Internal Revenue Code Section 108 debts forgiven in Bankruptcy are NOT included as income.
This is a critical distinction.
Especially if you have decided to negotiate directly with your credit card companies.
After you have missed a number of payments the credit card company may settle with you.
This means that they will allow you to pay a percentage of the debt and they will forgive the rest.
The problem is this forgiven debt becomes income and you will have to pay taxes on it.
Thus, the benefit of Bankruptcy is that the discharged debt does not have any real impact on taxes since it is not included as taxable income.
However, this does not mean that there may not be other consequences.
You may not be able to take certain tax credits and deductions you might otherwise have been able to if you had not filed.
The amount discharged may be required to reduce any tax attributes, such as operating losses, capital loss carry-forwards, basis reductions, and others.
It is important to discuss these issues along with the impact of filing Bankruptcy with your accountant.
To ensure that you don't need to pay taxes on discharged debt in Bankruptcy and to properly allocate any tax attributes, make sure to file IRS Form 982 for the tax year in which you received your Bankruptcy discharge.
Always remember that although an Automatic Stay goes into effect as soon as you file for Bankruptcy, it does not stop the IRS from: 1.
Auditing you 2.
Demanding you file tax returns 3.
Sending you a notice of tax deficiency 4.
Making tax assessments and issuing of a notice and demand for payment of assessments.
With any legal matter it is important to seek out legal counsel that is going walk you step by step through the process.
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