Filing bankruptcy is a serious decision that can set you free from a lot of unnecessary stress. In fact, it can give you a new lease on life. The phone stops ringing off the hook and trips to the mailbox are no longer met with piles of bills you simply can’t pay. At the same time, there are some important obligations you need to know about when it comes to filing taxes as they relate to bankruptcy, especially after you have filed.
Filing Bankruptcy on Taxes
When you file bankruptcy, you want to include every single debt you have. Any debts that aren’t listed on the original filing will not be included in the bankruptcy. You can only file once every eight years, so you want to make sure you don’t overlook or miss any debts, including tax obligations. It might be overwhelming to address and pull up each debt, but you don’t want to find out years after you file that you still have an outstanding debt that should have been included. Your bankruptcy lawyer can help make sure you have everything in order before you file.
End Your Tax Year Before You File
Most people file their taxes at the beginning of the year, filing on the income from the previous year. However, when you file bankruptcy, you can file taxes twice in one year. Depending on your situation, it might be best to file a tax return right before you file bankruptcy in order to account for all your income and debts up to that point. Once you file bankruptcy, you will file your next tax return on the regular schedule. Keep in mind that when you file the first return, you will not file your debts as discharged by the bankruptcy because they haven’t been discharged yet. However, you will file on discharged debts if they were discharged prior to filing your bankruptcy.
Estates for Taxes
In some bankruptcy scenarios, your bankruptcy will be a separate estate and will be filed separately than your normal tax returns. Instead of using an IRS-1040 for this, you will use an IRS-1041, a form specially created for bankruptcy situations. The estate is often represented by a trustee who may review transactions and report taxable events on the estate’s final tax return. Depending on your bankruptcy and individual circumstances, you may be required to apply any refunds from your 1040 to the estate. However, it’s best to consult your bankruptcy lawyer if you have questions or concerns.
There are many other aspects you should know regarding filing taxes after bankruptcy. It’s crucial that you discuss your personal tax situation with your lawyer to figure out the best way to address taxes after your bankruptcy. Your lawyer may even be able to provide or refer a trustee or an accountant who can guide you through the process.
Do you have questions or concerns about filing taxes after a bankruptcy? Let us know in the comments and don’t forget to share this information with your friends and family.