The reaches of my law practice include much of rural Lorain, Cuyahoga, Medina and Huron counties. When I mention hunting season does it conjure ideas of deer rifles, 4 wheelers, days in the woods, beer, and deer meat?
This is not hunting season for that big buck or doe. The weapon of choice in this hunt is pen and paper. This is open season on your fat tax refund when you are either in bankruptcy or you are planning bankruptcy. When you file bankruptcy you are required to deliver a copy of your most recent filed tax return to your case trustee 7 days before your meeting of creditors.
Hunting the Elusive Tax Refund
The tax refund has always been a great source of funds for a bankruptcy trustee to recover, disburse to your creditors and pay himself a portion as trustee fees. Fortunately, Ohio is one of the states that has an exemption for earned income credit, and if you receive that, you keep the additional child tax credit as well. If you are low income you keep them both.
Earned Income Credit Is Safe
If you have a big tax refund, and you do not qualify for the earned income credit and the additional child tax credit don’t be shocked if your bankruptcy case trustee wants to see your tax return for this year that you will file by April next year. If you have another big refund, the trustee may issue an intercept to the IRS having it sent to him instead of you. He will then prorate the refund to the date of filing. That means that whatever percentage of the year had yet to pass after your bankruptcy petition date will be yours.
The trustee will then apply any remaining exemptions there may be for cash on hand or the wildcard for you and for your spouse if she had income. Any funds left are his to disburse to creditors.
Trustee Starts Hunting in August
Hunting season for your tax refund starts in August and will extend until after you receive your federal and state refunds next year. If you customarily have a large refund or think you may have one start planning. You don’t want to be that deer in the headlights.
Protect The Tax Refund
Your tax refund is at risk if it is any amount over $750. I have seen trustees dip this low. If you don’t receive your tax refund due to a child support or a student loan intercept, no worries. Otherwise, for now you are in control. You can:
- reduce the tax withholding by claiming more dependents,
- stop the federal tax withholding altogether and then resume it after January 1.
- stop having additional amounts withheld.
Listen To Legal Advice To Keep Your Money
Many of my clients have such an abiding fear of owing money to the IRS they refuse to adjust their tax withholding even after being warned. They actually prefer paying the over-withheld funds to the bankruptcy trustee instead of putting it into their own pocket just for the peace of mind of not owing the government.
If you are now in bankruptcy and the trustee wants to see your 2017 tax return, or you are contemplating filing bankruptcy in the next months the real goal is to pay the tax, and nothing more. Is it better to have the money now to benefit your family or to have a bankruptcy trustee pay it to your creditors?