2011 Tax Return Refund – Bankruptcy

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I recently filed my 2010 tax return, and thought that a lot of people that are considering filing for bankruptcy may have questions about a potential refund on their own 2010 taxes. For many, this refund is a huge part of the beginning of the year. For some, it can be the difference between being able to survive the year (even after bankruptcy) and having to make even more drastic changes.

Let’s look at one scenario. It is late January and an individual is considering bankruptcy. In the past three years the individual’s tax refunds has averaged approximately $4,000 (for both state and federal). The individual’s income level and family situation has remained consistent throughout the past three years (and the tax year in question). The individual estimates that a tax refund will equal the $4,000 level of the past three years. What happens if the individual files for Chapter 7 bankruptcy before filing a 2010 tax refund? Will that refund be confiscated by the trustee and distributed to creditors? Does the individual have to claim anything on the bankruptcy petition?

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The first question we have to look at is whether a tax refund can be considered “property of the estate.” Only property of the estate is subject to turnover (delivery) to a bankruptcy trustee, and distribution to creditors.

Adjusted Gross Income: The amount of adjusted gross income is sometimes referred to as the “magic line”, since it is the basis for several deduction limitations. For example, the limitation on medical expenses is one. A tax payer’s AGI is used to determine the phase-out of the otherwise allowable itemized deductions and personal dependency exemption amounts.

Standard Deduction or Itemized Deductions: Itemized deductions are personal items that congress has allowed as deductions. Included in this category are medical expenses, certain interest expenses, certain taxes, charitable contributions, casualty losses, and other misc. items. Tax payers should itemize their deductions only if the amount exceeds the standard deduction amount. The table below gives the standard amounts for 2010.

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Thus, while in our situation (person filing for taxes in January 2011), the entire tax return for 2010 becomes property of the estate and subject to turnover to the trustee, it is possible, and potentially likely, that the property will remain with the individual through the use of statutory bankruptcy exemptions. Bankruptcy planning comes into play again and the use of exemptions determines what someone can keep and what they cannot.

There is one more piece of tax information that should be briefly touched on. Should an individual owe taxes from a previous period, it is possible that an individual may not be able to exempt a refund owed. This would be a topic of another discussion…

Donating, recovering your hard-earned income, and invest; again and again, year after year, it’s very simple and an easy strategy to do. If I have been able to do it, any Canadian taxpayer can do the same. It is not rocket science. It is decision taking action.

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Harris Smith is a personal finance writer interested in home equity line of credit Don’t Miss Out! An expert Debt Consolidation consultant can help you reduce your monthly repayments.

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