Understanding Tax Debt
People can incur tax debt in several ways:
- Claiming too many exemptions on your W2 paycheck. Sometimes people manipulate the claimed exemptions on their paychecks to maximize their pay. However, by overstating the exemptions, fewer taxes are taken out of a paycheck than should be. This often results in end-of-year taxes being owed.
- Liquidating a retirement account. Retirement accounts are low/no tax if you wait until you are eligible to withdraw funds. People sometimes withdraw or liquidate these accounts prematurely which triggers a personal tax liability
Taxes and tax debt can be overwhelming to deal with. However, those who file bankruptcy can wipe these debts out if certain criteria are met.
When Can Tax Debt be Discharged?
When filing for Chapter 7 bankruptcy, your tax debt can be considered dischargeable if it meets all of the following criteria:
- Your taxes are income taxes
- You didn’t engage in willful tax evasion or fraud, or you didn’t file a fraudulent tax return.
- The debts are at least three years old, or due at least three years before your bankruptcy filing
- You were informed of your tax obligations by the IRS at least 240 days before you filed
- Your tax return for the relevant tax years was filed at least two years before filing a bankruptcy petition.
If you file for Chapter 13 bankruptcy, you will need to repay your tax debts in full as part of your payment plan. This means if you are interested in fully discharging tax debt, filing for Chapter 7 bankruptcy will likely be your best option.
Bankruptcy and Tax Liens
Filing for bankruptcy will not wipe out a prior tax lien. If a tax lien on your property has already been placed by the IRS, that lien will remain notwithstanding a successful bankruptcy case, discharge and closing. You need to pay off the lien to clear the title before you sell the property.
Learn More About Discharging Tax Debt Through Bankruptcy
Understanding how taxes affect your bankruptcy case is important. While taxes can be discharged in bankruptcy, there are situations where taxes and/or a tax lien will still survive the bankruptcy case. Determining whether a Chapter 7 or Chapter 13 bankruptcy is the most appropriate course of action is a decision for you and your skilled bankruptcy attorney. At the Law Offices of Mark L. Miller, we can help you determine what’s right for you and offer valuable advice to protect your financial future.
If you are interested in filing for bankruptcy, contact our San Diego attorney today.