How Does Chapter 13 Bankruptcy Affect Your Tax Return in Texas?

There’s an old adage that nothing is certain except death and taxes. Even though you may be able to address some tax debt with a bankruptcy filing, you still must file a federal tax return with the IRS. Chapter 13 bankruptcy lets individuals and small business owners develop a plan to reorganize their debt and repay their creditors.

Before you can file for Chapter 13 bankruptcy, you must have filed all required tax returns for the previous four years before the meeting of creditors is scheduled. In addition, you must file all current applicable federal, state and local taxes that are due during and after the bankruptcy process. Failure to file returns or pay current taxes during your bankruptcy may result in your case being dismissed. The IRS website can provide assistance in documenting and verifying that you have filed the appropriate forms.

Accounting for Canceled Debts on Your Federal Income Tax in Chapter 13

When you file your tax return during your bankruptcy, you should not include the amount from debts canceled due to your bankruptcy as income. If you have any losses in property that was reduced because of canceled debt, these reductions must be included on your tax return. Interest on amounts held in trust accounts by the bankruptcy trustee is not taxable and should not be included on your return.

You can still receive tax refunds while in bankruptcy, but those refunds may be delayed or used to pay down your tax debts. When you successfully complete your Chapter 13 bankruptcy debt reorganization plan, depending on your specific circumstances, some of your federal tax debt may be discharged. An experienced Texas bankruptcy attorney can help you determine which tax debts can be wiped out.

Income from Social Security, war crime or other reparations for crimes against humanity or terrorism are not included as part of your monthly income. After calculating your monthly income, you must compare it to the median family income for a similar-size household in the state of Texas (currently $48,948). If your monthly income is higher than the median, a means test is used to check if you would have enough money left over to pay some debts after all allowable deductions.

Ask a Texas Bankruptcy Attorney how Chapter 13 may Impact Your Taxes

The Oliva law firm helps people in Brownsville, McAllen, Harlingen, Corpus Christi and throughout the Rio Grande Valley get a fresh start with Chapter 13 bankruptcy. Our experienced bankruptcy lawyers can help you understand the tax implications and requirements for filing Chapter 13 bankruptcy.

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