I'm confused about tax return

[Gadmus126]

We haven't filed chap 13 yet but getting close, I asked my lawyer about the tax return and below is the response I received.

( If you receive and spend your tax refund before you file, then there’s obviously nothing to turn over to the Trustee. If you receive them and file bankruptcy before spending them, they’ll have to be turned over to your Trustee. You will have to turn them over every year thereafter while you are in your bankruptcy.)

So does this mean if they took this years tax return they will take every year after.

Thanks

[andy158]

This issue is district specific and will be clearly stated in your confirmation order after you file. Looks like he aleready answered it. Your are good with the return before filing, but subsequent returns will be turned over to the trustee.

[ValleYum]

If you get your refund before you file, I would be sure to spend it on exempt items or daily living expenses. Tires, insurance premium payment or groceries are okay... a new tv would be risky, IMHO.

[LadyInTheRed]

Gadmus126, with regards to you 2011 refund, the attorney's answer as you quote it is incomplete for a Chap 13. If you get your refund before you file and have some or all of it left at the time you file, the trustee will not take it. In a 13 you can keep all of your assets as long as your plan pays to unsecured creditors at least the value of your non-exempt assets (i.e., they receive in your 13 at least what they would receive if your non-exempt assets were liquidated in a Chap 7). If you use Federal Exemptions and don't need all of your homestead exemption, you may even be able to exempt the cash and not worry about the Chap 7 liquidation test. Unless there are things you really need to spend the money on, it's better to start your 13 with a cash cushion if you can.

a new tv would be risky.

As long as you can exempt it or your plan passes the Chap 7 liquidation test, even a TV shouldn't be a problem. Not that I'd recommend it as a wise pre-Chap 13 purchase.

[SMinGA2]

Sounds like in your district, refunds received during your plan go to the trustee.

Discuss with your attorney whether or not you should adjust your withholding to have more net income now and less refunded later. (The ultimate result is the same. More DMI now would go to the trustee.)

[ValleYum]

As long as you can exempt it or your plan passes the Chap 7 liquidation test, even a TV shouldn't be a problem. Not that I'd recommend it as a wise pre-Chap 13 purchase.

Nice catch on the exemptions, LITR! And, to think, here I am probably the biggest cheerleader for Federal Exemptions on the board and I missed this chance to preach about them!

This board is awesome in that respect - that we can catch the errors in such an appropriate and respectful way - thank you.

[Gadmus126]

I emailed the lawyers office again and this what she sent. How I understand this is our 2011 tax return we can keep but but our 2012 return will go to the trustee till the bankruptcy is dismissed

You must turn over any tax refunds you receive while you are in bankruptcy. So if you receive your refund today (for instance) and you don’t file until next month, chances are your refund will be spent by then so there will be nothing to turn over to your Trustee. . However, if you file tomorrow and receive your refund next month then you will have to turn that over to your Trustee.

[SMinGA2]

Exactly... Refunds received during (from when you file ch. 13 until discharge) your plan go to the trustee to distribute to creditors.

But not dismissed. That means you didn't complete your plan. Discharge comes at the end of the successful 13.

[ValleYum]

The federal BK exemptions allow for their wild cards to be used for many things other states don't have exemptions for including cash or your tax refund (that hasn't arrived yet for tax year 2011) and possibly the estimated refund for the months prior to filing BK13 (for tax year 2012).

Might be worth asking specifically about that.

[SMinGA2]

That would work, I think, for exempting the 2011 refund - claiming it as an asset. But I don't think it would work for future year refunds. Getting a tax refund generally means that you are having too much tax withheld. Having too much tax withheld means your DMI would be higher if you had it withheld properly. Higher DMI means higher play payment, more to creditors. (Some states may have rules exempting CTC and EIC refunds.)

If you could exempt future year refunds - then people could just increase withholding to make their DMI as low as possible.

The 2011 refund is already owed, as its based on a completed tax year. Something owed to you is an asset. The 2012, 2013, etc. refunds are not already owed to you, so those are not assets.

[ValleYum]

Okay - not a tax expert - just thinking - see where that got me? LOL Trustees' being able to take partial years taxes from Chapter 7 filers made me think outside of the box but I understand what you are saying! Thanks for the detailed explanation!

[Nofilb]

If you are paying 100% back, then your income tax return should not be required to be turned over to the trustee. At least that's what my situation is.

[LadyInTheRed]

If you are paying 100% back, then your income tax return should not be required to be turned over to the trustee. At least that's what my situation is.

It will vary by district. People have reported having to turn over their refunds even though they are in 100% plans. There's no guaranty your DMI will stay the same for your entire plan. Your plan could end up being modified so that you are no longer paying 100%. If the trustee or a creditor objects to the plan, the court can only confirm it if it submits all disposable income to the plan. See Bankruptcy Code Section 1325(b)(1)(B). If your disposable income is calculated using a certain level of tax withholding and you end up getting a refund after that amount is withheld, that refund is disposable income unless there has been an increase in your expenses. So, a trustee is justified in insisting that tax refunds be turned over. You are fortunate to have a trustee that doesn't insist on it.

This board is awesome in that respect - that we can catch the errors in such an appropriate and respectful way - thank you.

Yes, it is awesome that way. I always appreciate it when somebody catches my errors. None of us want to mislead anybody.