It’s that time of year again…taxes.  A tax refund is typically caused by the taxpayer having too much tax deducted from their paycheck.  Many taxpayers rely on their income tax refund each year. Did you know that the bankruptcy court could seize part or all of your tax refund?

The “bankruptcy estate” is made up of all the assets that the debtor has and has a right to receive at the time the bankruptcy petition is filed.  All assets, unless exempt, are subject to the bankruptcy proceedings and could be distributed to the debtor’s creditors.  A debtor’s greatest concern is avoiding the bankruptcy court taking certain assets, and the tax refund may be one of them.

Importance of Strategy

Bankruptcy planning is important in strategizing losses.  Several things can be done to avoid losing your tax refund if you plan ahead.  One way to protect your refund is to plan the timing of your bankruptcy filing.  Keep in mind that even if you receive and spend your refund prior to filing, the bankruptcy trustee may assert a claim to your refund in the following year.  Whether the trustee may take part or all of your refund depends on the time of year the bankruptcy is filed.

Debtors should be aware that the trustee, regardless of planning or any exemptions available might not always seize a tax refund.  In some jurisdictions, refunds attributable to the Earned Income Credit are never considered part of the bankruptcy estate.  Also, if a married debtor files a bankruptcy petition, only the pro rata share of income reported by the debtor on a joint tax return is subject to seizure.

Useful Credits or Exemptions

In Indiana, the Earned Income Credit  (EIC) is a tax credit for certain people who work and have earned income under $43,750.  This tax credit reduces the amount of taxes owed.  To claim Indiana’s EIC, a taxpayer must meet certain criteria depending on your income and if you have children.

Debtors that live in states where they are able to utilize federal exemptions are able to retain their entire refund.  Those without homes are most likely able to retain their entire tax refund through what is known as the “wildcard” exemption.  The “wildcard” exemption is available in Chapter 7 bankruptcy and provides exemption for property that is not normally covered under other exemptions.  Some states have the “wildcard” exemption while others do not.  Those that do designate the amount of the exemption.  Indiana does have the “wildcard” exemption and it currently is $8,000 of real estate or tangible personal property.

If you are worried about how bankruptcy may affect your income tax refund, it is important to talk to an experienced attorney so that with his/her knowledge and planning you can try to keep all or some of your refund.  Attorney Christopher L. Arrington is an Indiana bankruptcy attorney representing clients in Putnam and Hendricks Counties and throughout central Indiana.  Call today to discuss how to protect your tax refund.