Today is tax day 2020. Thanks to Covid-19, the deadline for filing taxes is July 15 instead of the normal April 15. Besides doing taxes, some people might be considering bankruptcy due to job furloughs or losses caused by the pandemic. Filing taxes and bankruptcy always brings up interesting questions, the big one being, can I keep my tax refund if I file bankruptcy?
Property of the estate
We’ve talked about what constitutes property of the estate. Tax refunds, whether received or yet to be received, are property of the estate, meaning they are subject to the bankruptcy trustee’s control. If you’re thinking about filing bankruptcy and expecting a tax refund, keep in mind that any refund is property that is subject to being taken by the bankruptcy trustee. It represents money in the bank, so to speak, and isn’t covered by any exemptions in most cases.
Tax and bankruptcy planning
Usually people file their tax returns, receive their refund and then spend it before they file bankruptcy. That way there is no expectation of receiving the refund, and the refund is gone by the time they file. But the big question is, what should you spend your refund on?
How to spend the refund.
For starters, it isn’t a good idea to use that refund to make a deposit on the cruise you’ve always wanted to take, or to buy some diamond earrings. The reason is those kinds of things aren’t exempt in bankruptcy. If you turn your refund into non-exempt items, those items can be taken just as if the refund was sitting in your bank account. And it won’t work to withdraw the money and stick it in a shoe box under the bed. It still has to be reported on your bankruptcy schedules as “cash on hand” and will have to be turned over to the trustee.
There are things you can safely spend the refund on. Paying your attorney is one of those. You can use the refund to buy necessities. You are permitted to have a year’s worth of food storage, so you could stock your freezer and pantry. Household appliances are exempt. If your stove only has one working burner and the oven is permanently set at 300 degrees, you can buy a new one. Same for the washer and dryer. Home or car repairs (if you’re going to keep your home or car) are also fine. Just be sure the repairs don’t increase the value of the home or car above your allowed exemption limit. If you want to save that money you can contribute it to an IRA.
There are ways to preserve your tax refund. The best thing is to talk with an attorney who knows bankruptcy law and what exemptions you are entitled to. If you have bankruptcy questions, contact us here, or text or call (801) 413-3708; or email firstname.lastname@example.org.