Income taxes: Never knew this!

[wellspring]

And I'm wondering why my attorney never mentioned it to me. If I had known, I would have ended it early and gotten it over with instead of playing this waiting game! He was so darn thorough with everything else....

Election to End Tax Year
If you are an individual debtor and have assets (other than those you exempt from the bankruptcy estate), you may choose to end your tax year on the day before the filing of your bankruptcy case. Then your tax year is divided into 2 “short” tax years of fewer than 12 months each. The first year ends on the day before the filing date, and the second year begins with the filing date and ends on the date your tax year normally ends. Once you make this choice, you may not change it. Any income tax liability for the first short tax year becomes an allowable claim (as a claim arising before bankruptcy) against the bankruptcy estate. If this tax liability is not paid in the bankruptcy proceeding, the liability is not canceled because of bankruptcy and it can be collected from you as an individual.

http://www.irs.gov/publications/p908/ar02.html#d0e236

[JollyGG]

You need to clerify your post for me. Exactly what were you waiting for?

What would this information have changed for you?

[wellspring]

I could have ended my tax year early, trustee could have taken what he wanted of my refund and I wouldn't have to wait until regular filing time.

[JollyGG]

But, if you don't seperate the tax year you can increase your withholdings, have the money in your pocket the second half of the year and leave the trustee with too small of a tax return to bother with.

If you divide the tax year you are saying "Here have it, I don't need it. I'll just take my return from the second part of the year. The first 1/2 is all yours."

[wellspring]

hmmmm.....never thought of it that way....

[HHM]

Yeah, that separation of tax year is out there, but is rarely used.

The reason you would do it is if you would have to PAY taxes. The reason being, in BK the Tax Liability becomes a priority claim (I think so anyway) and gets paid ahead of other claimants.

Thus, if you have an ASSET BK 7, and would PAY taxes, you would want to consider separating your tax year. But with the median income requirements now, it's rare for any chapter 7 debtor to be in a position such that they would actually pay taxes vs getting a tax refund.

There is no reason to separate the tax year because of the refund. Most trustees calculate their share of the refund as if you separated your tax year anyway.

[wellspring]

I get it now! I guess that's why my lawyer didn't mention it......learn something new every day