Fong Law Group

Does Filing Chapter 7 Affect Your Tax Return?

Some people who file for Chapter 7 bankruptcy can keep the tax refund, though not all. The rules of the state, and the pre-bankruptcy safety measures you take to secure the refund, will determine whether you can maintain it.

What Year Did You Get Your Tax Refund?

The first step in evaluating whether you can hold the tax refund is to determine whether it was received before or after you filed for bankruptcy.

Any profits generated after declaring bankruptcy that leads to a profit is yours to hold. If you earn a tax refund depending on the salary earned before declaring bankruptcy, it will be included in the bankruptcy estate, whether you got it before or after the date of filing.

Taxes and Bankruptcy

If you're concerned that you'll lose your refund if you file for bankruptcy, there are steps you can take to protect it. In most situations, you'll be able to maintain the refund if you:

• have sufficient time to reduce the withdrawal to a minimum amount
• spend the reimbursement on major expenses
• defend (exempt) the repayment with a bankruptcy exemption

Make Changes to the Tax Withholding

If you expect to declare bankruptcy in the coming year, you can prevent a refund by changing the withholdings so that you pay the tax you deserve.

You'll receive more money in every paycheck, which you can put toward necessities. It's critical, however, to ensure that you proceed to withhold enough money to cover the money you owe. If you live near Monterey Park California and surrounding areas, you can contact Fong Law Firm.

Getting Ready for Chapter 7

Here are some tips to help you keep the tax refund if you file for Chapter 7 bankruptcy.

If you file your taxes during the tax season: When people file for bankruptcy during tax time, they often have to find what to do with their tax refund. To preserve it, you can use wildcard exemption. If the state does not provide these exemptions, or if you wish to save the wildcard for something else, consider the following options:

After you've received and spent the tax refund, if at all possible, file bankruptcy. If you go this route, make sure to spend the refund on essentials (like the mortgage, medical bills, clothing, or food) rather than on new assets.

Make a payment to the bankruptcy attorney with the tax refund to cover the fees and expenses of the case.

To Protect Your Refund, Use an Exemption

By declaring the tax return as an exempt asset that the holder isn't allowed to use, you may even be able to hold it. This is how it goes.

When a borrower files for Chapter 7, all the assets become a piece of the bankruptcy estate. The trustee in Chapter 7 can use the resources you have when you request to pay the unsecured debts (that owed money that isn't protected by the property).

Most states do not allow you to keep much cash in a bank account under lock and key. Some government exemption systems, on the other hand, have generous wildcard exclusions that cover any estate you choose and can be used to protect a tax refund.

Call Fong Law Group at (626) 289-8299 for a FREE consolidation, and talk to an attorney today. We are here to help you get through this difficult time in your life, and help you with a Fresh Start.

Retired? Working Part Time? Check Tax Withholding to Avoid a Nasty Surprise

Retired? Working Part Time? Check Tax Withholding to Avoid a Nasty Surprise

“Millions of Americans receiving pensions could be in for a bad tax surprise next year.”

One item that may have escaped your attention about last year’s tax reform is that many pension payments are bigger, because of the new lower tax rates for 2018.  However, that nice surprise may be followed by the risk that you’ll have under-withheld at tax time come spring and be faced with a penalty, says The Wall Street Journal in “Are You Retired or Semi-Retired? Check Your Tax Withholding Now.”

This is similar to what is happening to paychecks for working people. Earlier this year, Treasury officials adjusted the withholding tables to reflect changes for 2018 made by last year’s tax overhaul, so these changes are taking place in both pensions and paychecks.  However, the adjustments didn’t include other changes. The current withholding tables include tax-rate changes but not the impact of the $10,000 cap on state and local taxes. The IRS says the tables never included this information.

The result is some pension recipients could end up being under-withheld, because the automatic adjustments to their pension payments set them too high. Most people must pay at least 90% of the taxes they’ll owe during the year or by the next mid-January, if they are paying quarterly estimated taxes in order to avoid paying a penalty. That penalty is based on an annual interest now at 5%.

Pension payments and tax filer’s circumstances vary widely, so knowing who’s at risk is tricky. A typical married pension recipient with a $50,000 pension has a reduction in withholding of about $818 per year. That cuts withholding by 20%: this is no small amount.

A pension payer who follows the government’s tables, isn’t responsible if they are under withheld.

Another challenge: most retiree’s income fluctuates. They may have part-time work some of the time or take retirement account withdrawals. Medical expenses may become big, or shrink, or may become deductible for the first time. Additional standard deductions kick in at age 65. It’s not a straightforward equation.

One expert notes that the responsibility is on the taxpayer to make sure the withholding is correct, not the employer.

To help, the IRS has posted a new withholding calculator. To use it, you’ll need a copy of your 2017 tax return and estimates of your income for this year. You may want to submit a revised Form W-4P, if you find there are changes warranted.

There are a few different scenarios, if you underpay. If income is less than $150,000 and you’ve paid in an amount equal to 100% of last year’s tax, often there is no penalty. If you’re earning more than $150,000, then the threshold rises to 110% of the previous year’s tax. Another is that the IRS sometimes will waive the tax penalties, if this is the year you retired or became disabled. Sometimes the IRS will cut you a little slack. You’ll need to send in Form 2210 with proof and an explanation that the mistake was just that—a mistake.

Reference: The Wall Street Journal (June 22, 2018) “Are You Retired or Semi-Retired? Check Your Tax Withholding Now”