Tax refund can I keep? Got two differant answers.

[jeff6898]

I am confused. I went to 2 differant lawyers as I am going to file chapter 7 due to home in foreclosure and car repo plus lots of medical bills.
I live in florida and one lawyer told me I would have to give my 2011 tax refund to the trusty. The other lawyer told me since I am including the house in the bk and it is being foreclosed on my exemptions will be $10,000 for not being having homestead property and that will include the tax refund so it will be mine to keep. Any ideas which one to believe?

[LadyInTheRed]

It wasn't easy to find, but, assuming you have been a Florida resident for 2 years and will use Florida exemptions, I think the attorney who says you have $10,000 if you don't claim a homestead exemption is correct. When I googled to find Florida's exemptions, of the many websites that list exemptons, only the Nolo Press site listed the personal property exemption that applies if you don't use the homestead exemption. I finally found an article on FindLaw that says the Florida Statute was recently amended. The relevant statute is at http://www.leg.state.fl.us/Statutes/...s/0222.25.html.

I read elsewhere that Florida exemptions are doubled for a married couple.

So, you each get a $4,000 personal property exemption since you won't use the homestead exemption and a $1,000 personal property exemtion per Florida Constitution Art. 10 § 4(a)(2)., for a total of $10,000 that can be applied to the tax refund and other personal property.

Hopefully, somebody from Florida who has filed recently will know from their personal experience. To be safe, I'd consult with a third attorney. But, it sounds like the first attorney doesn't keep up with changes in the law, which is a good reason to avoid him/her.

[jeff6898]

Thanks so much for the information. I will go ahead and consult a 3rd attorney like you suggested.

[daylate]

Also immediately change your with holdings so you either don't get or minimize your 2011 refund.

[jeff6898]

If I am able to keep my refund why would I want to minimize my refund? Guess better to be safe then having to fork over a nice refund.

[daylate]

Look at it as if you are getting your refund in advance-paycheck by paycheck. If you can exempt it no problem but why take a chance?

[btbeme]

Trustees consider a tax refund to essentially be earned income for the previous calendar year.

For instance, a refund you receive in February 2012 is a refund of income earned in 2011 but held by the federal government until you ask for it back via your tax filing.

If you file a BK in November 2011, that means (unless you changed your withholding earlier in the year) that 10/12 of your withholding (January - October)has been realized before you filed. If your refund is $2400, then 10/12 of that amount - $2000 - is a cash asset that the Trustee will likely take a stab at collecting. In fact, they WILL get it because they will likely file a hold with the IRS on any refund.


Best ways to avoid? If you have a state exemption that will cover your refund, make sure that it is properly listed on your BK filing. Better yet, change your withholding so the the refund shrinks and instead appears as a small bump to your weekly paycheck. That small bump will rarely affect your Ch 7 qualification.

So...change withholding and lose little or nothing, or get a refund and (probably) lose any part that is not exempt.

[daylate]

Just a point here that has always bugged me-changing your exemptions does not change your tax liability for the year and that is what you should show on your means test for taxes - not your withholdings. If your withholdings were to be used, everyone would drop their exemptions to zero, and withhold an extra 200 a pay. Exemptions claimed affect cash flow not tax liability.

[jeff6898]

Well had appointment with lawyer yesterday and started filling out the paper work. We have $10,000 in exemptions here in Florida since I am not claiming homestead. My income tax refund is usuallly betwen $4,000 to $5,000 . My other exemtions he used like furniture ect only came to $1,500 so he put the estimated tax refund as a exemrtion and it will easily be covered he said. According to him I will be able to keep 100% of the refund. We will see if he is right when the times come.

[espo1357]

I am confused. I went to 2 differant lawyers as I am going to file chapter 7 due to home in foreclosure and car repo plus lots of medical bills.
I live in florida and one lawyer told me I would have to give my 2011 tax refund to the trusty. The other lawyer told me since I am including the house in the bk and it is being foreclosed on my exemptions will be $10,000 for not being having homestead property and that will include the tax refund so it will be mine to keep. Any ideas which one to believe?

Can the BK wait, assuming you are getting a refund?

My lawyer suggested I many as many dependents as legally possible, to ensure no refund at the end of the year. If I get a refund, I have to give it to the Man.

[justbroke]

There's no reason to wait. The Florida wildcard is $10,000 for a married couple filing together and not claiming or receiving the homestead benefit.

For some background, the bankruptcy Trustee is entitled to recover, for the bankruptcy estate, that portion of any income tax refund already accumulated... prorated. So if you file in November, the estate would be entitled to 11/12ths of any refund. However, you just exempt the income tax refund.

So, both attorneys are correct. One of them just didn't go through the fact that you can exempt the refund using your wildcard exemption. The fact is that income tax refunds are property of the bankruptcy estate. However, you can exempt that refund and it would not be subject to distribution to the creditors.

I would never change my exemptions on the eve of bankruptcy unless I'm trying to correct an issue with underpayments. The Trustees and (most) attorneys know to include the average "refund" (or underpayment) in the calculation. Changing the tax withholding doesn't hide anything. btbeme has summed it up well. Don't just change your withholding because you think you're going to "hide" a refund or keep it out of the reach of the Trustee. The money that you're "hiding" will just show up as regular income in the calculations. I wouldn't play games with the withholding around filing time.

Exemption, exemption, exemption is the name of this game. You just exempt the funds, and you're done!

[daylate]

JB- Not trying to be argumentative bit I don't get the exemption advice. Here is how I look at it- I make 100k (I wish) my tax liability for the year is 20k. So on my means test and my Schedule I I show that. If I pay my taxes in equal installments over the course of the year. No refund, nothing due. Now if I don't with hold correctly and have an extra 500 a month taken from my check, I get a 6k refund. So trustee grabs it.(Assuming I can't exempt). So if I can claim the extra 500 a month as tax expense on the means test, why can't I make it 1000 and thereby qualify for a 7 if it is close? Seems to me your expected tax liability divided by 12 is your tax expense , not how much you have withheld. Thoughts?

[justbroke]

So if I can claim the extra 500 a month as tax expense on the means test, why can't I make it 1000 and thereby qualify for a 7 if it is close? Seems to me your expected tax liability divided by 12 is your tax expense , not how much you have withheld. Thoughts?

BI like discussion and this is a really good discussion on the merits of manipulating your exemptions for purposes of either causing an overwhithholding or underwithholding situation on your taxes.

Trustees look very specifically at withholding (overwithholding and underwithholding). This is the primary place where they can find additional "disposable monthly income" (DMI) when analyzing the Means Test (and Schedule I/J).

People misunderstand what the tax line is on the Means Test and Schedule I is for. It is to be "actual" taxes (shown as a monthly figure). This is why, in most jurisdictions, the Debtor's attorney (and the Trustee as part of due diligence) will take the average refund and divide it by 12, and then add that BACK into the income. You can't "hide" or park money there. It's the oldest "trick" in the book... but the Trustee has read that book too.

Your are right that it's your expected tax liability. If you are actually in an underwithholding situation, the Trustee actually subtracts money from your disposable income to account for underwithholding. Likewise, overwithholding is specifically attacked. If you are over-the-median you should expect that your numbers will be looked over by people who deal with numbers -- financials -- all day long and know when something is amiss.

This is why the Trustee (also) looks at the last three (3) years of tax returns. They are looking for what your REAL tax liability is. They can also "estimate" it as well.

[daylate]

Good explanation JB-thanks