Tax day is rapidly approaching for Americans, and one thing that weighs on debtors’ minds is what happens to any income tax refund they might receive. In particular, they may wonder whether the trustee will take their refund if they choose to file before their income tax deadline. Here are four things to know about how Nevada law treats income tax refunds in bankruptcy.
· The most common income tax refund that debtors receive is from their tax withholding. This is something the trustee will be interested in knowing about, so debtors choosing to file in the first four months of the year, or the last two, will agree to send the trustee their unfiled tax returns and hold any refunds they have so that the trustee can determine whether to liquidate it for the creditors’ benefit.
· As a result, it’s probably wise to wait until after tax season to consider filing bankruptcy. Often a tax refund can help pay for any filing fees. Most of an income tax refund is not subject to an exemption in chapter 7.
· The federal earned income tax credit (EITC), on the other hand, is subject to an exemption. Even though Nevada disallows debtors from using the federal exemptions, the EITC can be exempt via the state’s personal property exemption. Thus, to the extent that a taxpayer’s refund consists of the EITC, the trustee cannot place that in the bankruptcy estate and liquidate it.
· The same does not go for the child tax credit. The child tax credit allows people with dependent children under the age of 18 to claim a $1,000 tax credit per child. The Nevada property exemption doesn’t cover it, so the trustee may liquidate it.
How various tax refunds are treated in bankruptcy is not something people who file on their own might know about. In the best situations, debtors can use these tools to stay out of bankruptcy altogether, but in the worst, without careful planning and an experienced Las Vegas bankruptcy attorney handling your case, you might pay the trustee needless money that you could have saved for yourself.
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 1-702-880-5554 to set up your free consultation.