Tax season has just ended, and many Americans will receive a refund from the IRS. For those considering filing a Chapter 7 Las Vegas bankruptcy, the question arises: since the refund is income, does it go to the bankruptcy estate and can the Trustee take it? In most cases, the answer is yes, three factors are involved.
- The size of the refund. If it’s small, sometimes the Trustee will choose not to distribute it to creditors. This is a simple cost-benefit test of the cost of distributing it, so if it’s a few hundred dollars, it might be distributed.
- Whether you can exempt the refund. One might think that something like a tax refund wouldn’t be subject to an exemption since it’s money owed to the government, but in some circumstances it can be. Nevada, which does not allow petitioners to use the federal exemptions, allows petitioners to exempt an earned income tax credit. If that is unavailable for whatever reason, Nevada also allows up to $1,000 of property to be placed in a “wild card” exemption. The tax refund can be placed here if the exemption hasn’t been used up already.
- Other unpaid taxes. If you have any unpaid taxes from previous years, then the refund will go to those rather than the other creditors. This is because older taxes are priority debts under the tax code, meaning they get paid off first.
Any taxes you pay via withholdings are prorated over the course of the year until your bankruptcy filing, so if you filed in April, then the refund will be prorated for the January through March withholdings. The Trustee will inform you that he or she will distribute the tax refund during the 341 meeting. Finally, it’s permissible to file your return, obtain your tax refund, and then spend it on acceptable expenditures, for example, daily necessities or any legal fees you have related to your bankruptcy.
Income tax refunds are a small part of bankruptcy, but they might go unnoticed by people who choose not to hire an experienced Las Vegas bankruptcy lawyer.
For more questions about bankruptcy in Las Vegas, please feel free to contact an experienced Haines & Krieger Las Vegas bankruptcy attorney for a free initial consultation. Call us at 702-880-5554 to set up your free consultation.