Info re filing taxes and chapter 7

[PaKettle]

After doing a lot of research I still did not come up with a 100% clear answer as to whether or not I would need to do "anything special" on my taxes this year due to my Ch. 7.

Well, for what it's worth I found this at:

http://www.moranlaw.net/taxfaq.htm

"Is the debt discharged in bankruptcy "income" that has to be reported on my income tax return?
No. Debts discharged in a case under Title 11 of the United States Code (the Bankruptcy Code) are not "cancellation of debt income" on which you can be taxed. 26 I.R.C. 108 and 11 U.S.C. 346 (j)(1). That doesn't always deter creditors, some of whom issue debtors a Form 1099-C, reporting the cancelled debt to the IRS as income. If that happens, the debtor's remedy is to file IRS Form 982. Get the form. Note that the tax treatment of debt forgiven in bankruptcy is a marked difference between bankruptcy and debt management programs. See the dangers of debt management."
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Also, as far as I can tell, if you filed in 07 but do not get discharged until 2008, then this would in no way impact your 2007 taxes, in any case....

And according to the above FAQ discharge of debt in a Ch. 7 will not affect one's taxes.
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HOWEVER, DO NOT TAKE THE ABOVE AS TAX ADVICE, AS IT'S JUST "INFO I FOUND ON THE NET" AND WHO KNOWS IF IT'S RIGHT OR NOT. I SEE IT AS A BASIS TO DO FURTHER RESEARCH.

This might help explain things further. I have not read it yet although I expect it to be written in IRS gobbledy-gook-tax-code-voodoo language: the IRS BANKRUPTCY TAX GUIDE.

http://www.irs.gov/pub/irs-pdf/p908.pdf

Supposedly there is something especially relevant on page 22. I have not yet had time to read it but there it is for your delight and curiosity.
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I think I'll go ahead and use turbotax "basic" filing plan this year, and then next year maybe I'll use a CPA just in case.

[erinmi]

We had NO issue filing our 2007 taxes...

Our refund was exempted and we got it direct deposited on Friday

[PaKettle]

We had NO issue filing our 2007 taxes...

Our refund was exempted and we got it direct deposited on Friday

Right. However, the 2008 tax year may be a different story. I am reading the .pdf from the IRS and it seems that it is going to make post-discharge filing complicated - or at least it seems that it will in some cases.

Anyone here filed long enough ago that they had to file the next year's taxes already? After a ch. 7 no asset case? How did it go? What things do you have to report and do deal with differently than normal?

I read the entire IRS Bankruptcy manual (http://www.irs.gov/pub/irs-pdf/p908.pdf) and what I learned from reading it is that I learned almost nothing. I guess you have to have a certain type of mind to understand this type of stuff; it seems to say nothing in a straightforward way but rather tell you that you might have to do this and you might have to do that, but it's unclear (to me, anyway) as to what exactly one does need to do under what circumstances.

It says for instance that you CAN choose to make a "short year" filing, filing for the year leading up to the day you filed for bankruptcy, and then later file for the remainder of that year. You have 3 or 4 months (I forget which) after you file to make that decision. What was not clear to me was the reason one might wish to divide one's taxes into pre-bankruptcy filing and post-bankruptcy filing. I guess it has to do with assets that one has before bankruptcy that one may not have after bankruptcy, so as near as I can tell it is for people who have assets going into bankruptcy. As near as I can tell it MAY not affect those of us who do not have assets going into bankruptcy, but it never comes out and says that. (Why would it? It's written by someone at the IRS!)

So, after an entire day of research and after reading the IRS manual, I still have no idea as to what to do about my taxes. I THINK that I could get away with using TurboTax THIS year but I'm not sure and I THINK I may have to use a cpa next year, but I'm not sure. So probalby I'll just use a CPA both years to be on the safe side (but at a substantial cost, as cpa's are not cheap); which is what I was hoping to avoid.

Found this but I'm guessing it's nearly impossible to get through and even if you do they wouldn't give you a straightforward answer:
"You can call the IRS with your tax questions. Check your income tax package or telephone book for the local number, or you can call 1—800—829—1040."
Anyone ever try it?

[no_it_all]

Cliff notes version: If your debts were forgiven due to a Title 11 proceeding, you are <golden> and none of those forgiven debts are added to income. No additional taxes are due. End of story.

[AMISLANDER]

Right. However, the 2008 tax year may be a different story. I am reading the .pdf from the IRS and it seems that it is going to make post-discharge filing complicated - or at least it seems that it will in some cases.

Anyone here filed long enough ago that they had to file the next year's taxes already? After a ch. 7 no asset case? How did it go? What things do you have to report and do deal with differently than normal?

I read the entire IRS Bankruptcy manual (http://www.irs.gov/pub/irs-pdf/p908.pdf

I filed last year, after my Feb. 2007 discharge (only asset was my car), and this year .... there wasn't anything to deal with, just filing as normal.

[PaKettle]

Cliff notes version: If your debts were forgiven due to a Title 11 proceeding, you are <golden> and none of those forgiven debts are added to income. No additional taxes are due. End of story.

Thanks for clarifying. I will now just file my taxes as normal and not worry about it.

So why the complicated 28 page .pdf booklet on bankruptcy from the IRS?

Wait, don't answer that, I know the answer: the IRS likes to make everything as complicated as possible so no one understands it and CPA's have to be hired to interpret it. ;-)

Just a word of warning though:
From my research I did gather that if you have assets, you may have tax complications in a bankruptcy. That's because if you have an asset case, the Trustee creates a "seperate entity" which then has to file taxes on the property he is holding during the proceeding, and so you end up part of the year with x amount of property and the rest of the year minus some of that property. This is - apparently, as I understand it - where the complications come in. And - again, apparently- as I really barely understand what I read - there can be tax advantages for you to divide your tax year up into two short periods: before filing and after filing. This is where a good CPA would come into play.

So if you have assets going into a Ch. 7, (house, land, business, something of that nature, more than just a car and furniture) then you may want to hire a CPA.

I think I am right on this, please correct me if I am wrong.

[gophermn]

We had NO issue filing our 2007 taxes...

Our refund was exempted and we got it direct deposited on Friday

How do you know it is exempt? Is it ruled state by state or did you get a nice Trustee? I am a grown 40 yr old man. Do you think if I cry at my 341 my Trustee will let me keep some of the refund

[PaKettle]

How do you know it is exempt? Is it ruled state by state or did you get a nice Trustee? I am a grown 40 yr old man. Do you think if I cry at my 341 my Trustee will let me keep some of the refund

I'm guessing she knows it was exempted because her attorney told her so, based on exemptions in her state.

If you have no exemptions to use and your trustee is the type that takes refunds, I don't think crying will help. But it would certainly shake up the proceedings, I would think.

[erinmi]

How do you know it is exempt? Is it ruled state by state or did you get a nice Trustee? I am a grown 40 yr old man. Do you think if I cry at my 341 my Trustee will let me keep some of the refund

We had room in our exemptions as we weren't trying to keep a house and we were upside down in our cars, plus we have nada other than our clothes/furniture- no boats, bikes, etc.

[AlmostFree]

Only messy if Trustee takes certain assets

Gets complicated if trustee takes your assets that produce income or loss. Examples would be interest earned on bank accounts; dividends and gain or loss on sale of stocks, mutual funds, etc.; rental properties; and an on-going business. The trustee then is required to report income or loss to IRS. In other words since the assets still exist and you don' own them anymore, somebody must report income or loss to the IRS and that is the obligation of the trustee. The trustee also acquires any of your "tax attributes", which are losses not used by you but carried over on your tax return, such as capital loss carryovers, etc.

Cancellation of debt in BK case is never taxable to you, but if the above paragraph applies to you then the amount of the cancelled debt is used to reduce any "tax attributes" that you still have. This has the possible effect of increasing your income taxes over a period of years and now it gets really complicated.

If none of the above asset situations do not apply to you, don't worry about it, you don't need to do anything.

AlmostFree

[PaKettle]

Gets complicated if trustee takes your assets that produce income or loss. Examples would be interest earned on bank accounts; dividends and gain or loss on sale of stocks, mutual funds, etc.; rental properties; and an on-going business. The trustee then is required to report income or loss to IRS. In other words since the assets still exist and you don' own them anymore, somebody must report income or loss to the IRS and that is the obligation of the trustee. The trustee also acquires any of your "tax attributes", which are losses not used by you but carried over on your tax return, such as capital loss carryovers, etc.

Cancellation of debt in BK case is never taxable to you, but if the above paragraph applies to you then the amount of the cancelled debt is used to reduce any "tax attributes" that you still have. This has the possible effect of increasing your income taxes over a period of years and now it gets really complicated.

If none of the above asset situations do not apply to you, don't worry about it, you don't need to do anything.

AlmostFree

Thanks AlmostFree, that explains it quite clearly.

The IRS should pay you to write a brochure for them. No, nevermind, they don't want us to know what they are saying. That is clear from reading their 28 page pamphlet on Bankruptcy.

I think they did a fair-to-middlin' job of explaining what to do in the above scenario (if you have assets taken by the Trustee) but they did not do a good job of explaining that it doesn't affect one at all if one does not have assets - as you just explained quite clearly. Thanks again.

[concerned]

What about a 1099-A??

I already filed for 2008, but then was sent a 1099-A as me and my ex-husband foreclosed on our house, but the house was part of our ch. 7. Anyway, I am confused as well regarding what to do for 2008. The 1099-A shows a "Balance of principal outstanding" in box 2 being more than the value in box 4 "Fair Market Value of property". Box 5 is checked as "Yes" borrower was personally liable for repayment of the debt. Do we have to claim any of this loss (?) on our 2008 return or not since it was included in our Ch. 7?

Thank you,

Concerned

[PaKettle]

I already filed for 2008, but then was sent a 1099-A as me and my ex-husband foreclosed on our house, but the house was part of our ch. 7. Anyway, I am confused as well regarding what to do for 2008. The 1099-A shows a "Balance of principal outstanding" in box 2 being more than the value in box 4 "Fair Market Value of property". Box 5 is checked as "Yes" borrower was personally liable for repayment of the debt. Do we have to claim any of this loss (?) on our 2008 return or not since it was included in our Ch. 7?

Thank you,

Concerned

Since there is property involved, I would probably get a tax guy to help me with this, in your case. You can read the pdf above from the IRS, it does explain it half-way decently as regarding asset cases.