You can consider taxes and bankruptcy together in a variety of ways, from whether you can discharge income tax or property tax debt to whether the IRS will assess taxes against you for discharging any debts. You can discharge certain taxes and not others, and the bankruptcy discharge is not taxable income.
Discharge is Not Taxable Income
A bankruptcy discharge is not taxable income. Although the IRS and state governments will tax you if a creditor forgives debt in your favor, debts discharged in bankruptcy are an exception. A bankruptcy discharge wipes out your legal obligation to repay discharged debts; it does not erase the debt itself. The federal government has specifically exempted bankruptcy discharge from taxable income, so no matter how much debt discharge in your bankruptcy, you will not have to pay income taxes on it as forgiven debt.
Discharging Property Taxes
If you owe property taxes when you file bankruptcy, you must repay them if you want to keep the property. Property taxes are secured debts, which means that the city or county has a lien on your house for the taxes owed. You must repay secured debts in bankruptcy if you want to keep the collateral. If you give up the property, you don't have to pay the property taxes; they're included in your discharge.
Discharging Income Taxes
The general rule is that income taxes are nondischargeable; however, you can discharge certain income taxes. If you owe income taxes either to the IRS or to a state government, and those taxes were assessed more than three years before you filed bankruptcy and you filed those returns on time, you can discharge the taxes. However, if you filed your returns late, you can't discharge the taxes, even if they were assessed more than three years ago. You also can't discharge taxes if you filed your return on time more than three years before you filed bankruptcy and the taxing authority didn't assess taxes until within the three-year period before you filed bankruptcy.
Tax Returns After a Bankruptcy
You can file your tax returns as normal after a bankruptcy. You also have the option of splitting your tax year into two smaller tax years if you file a Chapter 7 or a Chapter 11 bankruptcy. The first small tax year is for the period of the calendar year before the day you file bankruptcy, and you file that return on or before the 15th day of the fourth full month after the day you file bankruptcy. The second small tax year is for the period after that day, and you file that return the following year at tax time, as usual. For example, if you file bankruptcy on June 30, you can file a tax return for the period of January 1 through June 29 on or before October 15. You can then file a tax return for the period of June 30 through December 31 the following year at tax time. If your bankruptcy is a Chapter 13 bankruptcy, simply file your taxes normally every year, during and after your case.
- United States Courts: Bankruptcy Basics: Discharge in Bankruptcy
- American Bankruptcy Institute: U.S. Code, Title 11, Section 524
- American Bankruptcy Institute: U.S. Code, Title 11, Section 523
- Internal Revenue Service: Publication 525: Canceled Debts
- Internal Revenue Service: Publication 908: Bankruptcy Tax Guide
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