Question regarding daring to spend tax refund before filing

[butterflywings]

Hi.

Today I filed online our state and federal taxes using e-file from the Irs website and using turbotax. Between the two we are getting $7300. We've never gotten nearly this much before. We usually get about $4k. This year we got $5300 for federal (EIC, CTC) and $2000(NY EIC, overpayment of state taxes) for state.

We are going to have drywall put in our living room, it's a long story but earlier in the year we tore wallpaper down in our livingroom only to be shocked at the condition of the drywall. We had a drywaller come out and he said that we need to put up new drywall, which was quite obvious. Plus we need to have an electrician come in to rewire the livingroom and put in a new electrical box or what have you. I know nothing about electricity but whatever we have is the ancient kind, it's not up to date, it's based on 1947 when the house was built. We have had problems with our electricity over the last year in the living room where the power on one side of the living room goes out and yet when you bang on the wall it comes back on. Wth that means I don't know.

And then last night I went to plug in my laptop battery and sparks flew out. Is that as bad as I think it is? I'm afraid of an electrical fire. A couple of months ago out of the blew I was sitting in the livingroom one night around 11:30pm by myself and one of our livingroom chandelier lightbulbs exploded right there and glass came showering down in a billions tiny pieces. It was spooky.

I don't know what an electrician would charge to bring our living room wiring up to date, but this has got to stop and now is the time to do it since we are putting up drywall. The insulation around the wiring is hard and brittle because of the old wires.

What if we spend say $5k to do all of this, I know about exemptions and all, but don't you think the trustee would be thinking in his mind a combination of or even . I know these are necessities but wouldn't spending $5k or so a few weeks before filing just be shall we say a little bit in your face to the trustee? And would paying these two guys for their services be considered a PP?

I guess now that the money is almost here I'm afraid to do what needs to be done for fear it's going to bite me in the you know what come March, but if I don't spend it on these 2 things that we need, the trustee is going to line his own pockets with it. I say let him have 1/2 of 1/6 of my joint refund next year. In my area if a spouse files BK individually but files taxes jointly, they only take 1/2 the refund after exemptions.

Do other people really have enough nerve to spend their refund before filing?

I've seen attorneys recommend it online that using the refund before filing is the smart thing to do but in practice how do people do that and then have to look the trustee in the eyes at the 341?

[FreshLikeADaisy]

As long as these things are necessities, and you keep the receipts for them, there's really nothing that can be said. As far as luxury purchases go, there's a pretty definite understanding of what they are. If you're really concerned, you can have the electrician dandy up the receipt with extra wording, such as "living room wiring replaced, out of code, fire hazard," that sort of thing. It's not dishonest, and if it is ever questioned it speaks for itself: an expert on the subject has just put it in writing.

As far as using the refund before filing, the whole point of bk is that if you actually HAD any money you wouldn't be here. The tax return is a lifeline for SO many that it's hard to imagine it being a problem that it was already spent on necessities. That's just my thought on it, but I haven't ever seen it questioned: once it's gone, it's gone, whether the trustee would have liked to have it or not. You are very conscientious and scrupulous, and I admire your integrity.

[Lindsay]

Butterfly, we already filed too and we also are getting back more than we thought! About $1500 extra! I am planning on spending it on non-luxury items before we file. We have just retained our lawyer several weeks ago and I will pay off the remaining money we owe him out of the tax return. Then I'll buy some groceries for our very bare pantry and kitchen, pay one house and car payment, make a few home repairs, take the dogs to the vet for shots, pay homeowners & car insurance and catch up on overdue utility bills. I've got a big list of essential things that I've been putting off for a while.

Our lawyer told us that we could exempt the tax refund in lieu of homestead (we have a house but no equity in it - we're in NY), but I don't want to take any chances.

[butterflywings]

As long as these things are necessities, and you keep the receipts for them, there's really nothing that can be said. As far as luxury purchases go, there's a pretty definite understanding of what they are. If you're really concerned, you can have the electrician dandy up the receipt with extra wording, such as "living room wiring replaced, out of code, fire hazard," that sort of thing. It's not dishonest, and if it is ever questioned it speaks for itself: an expert on the subject has just put it in writing.

As far as using the refund before filing, the whole point of bk is that if you actually HAD any money you wouldn't be here. The tax return is a lifeline for SO many that it's hard to imagine it being a problem that it was already spent on necessities. That's just my thought on it, but I haven't ever seen it questioned: once it's gone, it's gone, whether the trustee would have liked to have it or not. You are very conscientious and scrupulous, and I admire your integrity.

You are so sweet and I thank you so much for your kind words! You are conscientious as well, especially about helping everyone here. This place would not be the same without you!

[butterflywings]

Butterfly, we already filed too and we also are getting back more than we thought! About $1500 extra! I am planning on spending it on non-luxury items before we file. We have just retained our lawyer several weeks ago and I will pay off the remaining money we owe him out of the tax return. Then I'll buy some groceries for our very bare pantry and kitchen, pay one house and car payment, make a few home repairs, take the dogs to the vet for shots, pay homeowners & car insurance and catch up on overdue utility bills. I've got a big list of essential things that I've been putting off for a while.

Our lawyer told us that we could exempt the tax refund in lieu of homestead (we have a house but no equity in it - we're in NY), but I don't want to take any chances.

Hey Lindsay! Enjoy the warm up tomorrow that NY's are going to get. lol Hey, did your lawyer advise you to go ahead and spend it as well? How much are you getting back from the IRS?

[gophermn]

butterfly - I dont mean to steal the thread but my question is very close to this.

I haven't done my taxes yet and the 341 is 2/29/08. I am sure I will get roughly $5000 refund. Can this refund be spent on home improvements or do I need to save onto the refund before - during and after the 341? This refund will INDEED be the silver lining of making my wife and I feel more comfortable and breathing room- but I dont want to get into trouble when the trustee asks how much my refund will be and what my plans are with the $$$.

[DVDFreaker]

butterfly - I dont mean to steal the thread but my question is very close to this.

I haven't done my taxes yet and the 341 is 2/29/08. I am sure I will get roughly $5000 refund. Can this refund be spent on home improvements or do I need to save onto the refund before - during and after the 341? This refund will INDEED be the silver lining of making my wife and I feel more comfortable and breathing room- but I dont want to get into trouble when the trustee asks how much my refund will be and what my plans are with the $$$.

If you don't want to get in trouble, give the trustee your $5000 refund and all will be good

[phoenyx]

butterfly - I dont mean to steal the thread but my question is very close to this.

I haven't done my taxes yet and the 341 is 2/29/08. I am sure I will get roughly $5000 refund. Can this refund be spent on home improvements or do I need to save onto the refund before - during and after the 341? This refund will INDEED be the silver lining of making my wife and I feel more comfortable and breathing room- but I dont want to get into trouble when the trustee asks how much my refund will be and what my plans are with the $$$.

There's a lot of details that we don't know, so we can't give you an exact answer.

Are you filing through a bankruptcy attorney, or doing it yourself? If you are filing through an attorney, I would suggest telling him how much you are expecting to receive, and what things you would like to spend it on. He should know the way refunds are handled in your area.

Each state is allowed to come up with its own exemption rules (what assets - type and amount - that you are allowed to keep in a bankruptcy.) Some states have a wildcard exemption that you could apply toward the tax refund, if something isn't using it yet. If you have no equity in a home, or perhaps if your equity is lower than the allowed amount, some states allow a certain amount of the unused home equity exemption to be used toward other assets including a tax refund.

If you handle this with an experienced attorney, you won't get in trouble if you keep the refund - and use it in ways that your attorney says won't rock the boat... There's often perfectly legitimate and legal ways to spend or keep tax refunds, either by spending it on necessary expenses, or converting it to exempt assets. Smart planning of a bankruptcy, within the law, won't get you in trouble or violate the law.

[Lindsay]

Hey Lindsay! Enjoy the warm up tomorrow that NY's are going to get. lol Hey, did your lawyer advise you to go ahead and spend it as well? How much are you getting back from the IRS?

Hi, Butterfly! LOL, I'm hoping that the snow doesn't melt in droves and the sump pump goes out of commission again! We're planning on buying a new sump pump out of the tax check when it comes, ours breaks all the time! I think we're on our 8th sump pump in 5 years! We showed our lawyer our 2005 and 2006 taxes and our estimated 2007 tax refund. He said if we had no equity in the home (we showed him mortgage statements & property tax records to prove no equity), we could exempt it. He told us to go ahead and file our 2007 taxes as soon as possible before we file. We're getting back about $5200. I was suprised at the amount but am looking forward to stocking up on things and getting caught up on other bills.

I still didn't want to take any chances so I filed quickly and we'll pay off the rest of his fees with some of the tax money. I figure by the time we actually file, it will be March and the 341 won't be until mid-April and the tax refund will be just a happy memory by then. I did tell the lawyer that we always use our tax refund for necessary items like catching up on food, paying insurance and house taxes and utility bills.

[tay666]

butterfly - I dont mean to steal the thread but my question is very close to this.

I haven't done my taxes yet and the 341 is 2/29/08. I am sure I will get roughly $5000 refund. Can this refund be spent on home improvements or do I need to save onto the refund before - during and after the 341? This refund will INDEED be the silver lining of making my wife and I feel more comfortable and breathing room- but I dont want to get into trouble when the trustee asks how much my refund will be and what my plans are with the $$$.

So you have actually filed your BK already, but have not gotten your tax return yet?
If that is the case, I would not do anything with that money without the ok of your lawyer, or the trustee.
The trustee may see that as an asset in your BK and if you go and spend it, he may want it back, and you will really have a problem then.
Even though you aren't geting the money until after you filed your BK. It is a refund of money you paid in 2007, so it can still be viewed as an asset of the BK estate.
A lot depends on your trustee and how he usually handles things, and on your exemptions and what they can be used for.

[BKcrazy]

When I thought I was getting a refund (I owed of course), my attorney gave me the simplest advice. Do not spend it on anything "fun".

[phoenyx]

When I thought I was getting a refund (I owed of course), my attorney gave me the simplest advice. Do not spend it on anything "fun".

Yeah, that seems to be the general rule. Although, depending on exact location and customs, it can be a different. You definately can't spend it on fun/luxury stuff. In some locations, you will run into trobule if it's a large refund which isn't covered by your exemptions. In most locations, I believe, if it's not absolutely huge, and you spend it on ordinary expenses or convert it into other exempt assets, you're usually OK. It all comes down to those customary practices of the location you file - and the attorney should know those inside and out.

tay666 was right, that even if you receive your refund after you file, they view it as kind of a deferred payment from a period that you are filing on, since the refund is for the prior year. Even if you file in November, or earlier, some locations allow their Trustees to go after refunds that people get months later on their filing -- since the year the refund applies to was almost done when you filed.

[gophermn]

Ok, so what does this mean. My Attny said "I still have some money left on my wildcard exemption" so the taxes should be exempt.

[phoenyx]

gophermn, exemptions are the legal amounts for each category of assets that the Trustee in your bankruptcy cannot take. They created these exemptions so someone filing bankruptcy wasn't absolutely stripped of everything they had, but could be stripped of things being not ... necessary for a minimum standard of life I guess would be the way to look at it.

The wildcard exemption is available in some states, and not others, since each state gets to create its own exemptions. The wildcard exemption, which sounds like is available to you since your attorney mentioned it, can be applied to any assets that you haven't exempted using a different exemption. It's a catch-all for anything else you want to keep.

If your wildcard exemption hasn't been used up yet, you can declare the amount of the refund up to the exemption amount to be "hands-off" for the Trustee in your bankruptcy.


States that do not have a wildcard exemption, or states that allow you to use the federal bankruptcy exemptions, sometimes will allow you to use the unused portion of your home exemption up to a certain limit as a wildcard exemption.

If you want to see your state's exemptions, you can go to "http://www.thebankruptcysite.org/", scroll down and click on your state. Near the bottom of the next page, you should see a link for "Bankruptcy Exemptions" for your state. This isn't my site, and although it seems reputable, I can't verify all of its information is correct. But, your attorney can.

[FreshLikeADaisy]

Gopher, what the atty is saying is that if the trustee wants your tax return, he will amend your Schedules B & C to include it as an asset, and then exempt it via your unused wildcard in the same breath. But it seems to me that other Minnesota posters have said that MN doesn't take tax returns. I could be wrong on this, but it's worth searching the forum on. I hope all is going well for you!!!