Will my tax debt be wiped out in a bankruptcy? For many, that's a huge question. It's also a question that a lot of professionals, bankruptcy attorneys included, don't have the answer to. In most cases, the answer is "No." Taxes are not discharged in a bankruptcy. That's because the same people who wrote the Bankruptcy Code, Congress, are the same people who wrote the Internal Revenue Code and the government takes care of itself. Letting people discharge taxes in bankruptcy would seriously hamper the government's ability to do business.
Tax debt CAN be discharged if all these conditions are met:
1. The taxes are income taxes. Other types of tax, such as payroll taxes or the "personal liability assessment" for officers and directors of a company that didn't pay over payroll taxes, tax penalties and the like are not dischargeable, ever.
2. You filed a return for the period in question. If you've been delaying filing a return, the taxes can't be discharged regardless of how old they are.
3. The taxes are at least three years past due. Since income taxes are not due until April 15 of the year following the calendar year for which the tax applies, this means three years after April 15 for the prior year.
4. You didn't commit fraud, such as wilfully evading paying, using a false social security number, etc.
5. You pass the "240-day" rule, which says the IRS must have assessed the tax more than 240 days before you file, or it hasn't yet assessed the tax. If you fall between those two deadlines, they can't be discharged.
WARNING: Even if you are able to discharge the taxes, if the IRS filed a tax lien against any property you own, that lien, just like other liens, such as mortgages or judgments, passes through bankruptcy unaffected and can still be enforced against the property.
If you are filing bankruptcy because of tax debt (this includes state taxes as well as federal), be sure you talk to a knowledgeable tax and bankruptcy professional before filing.
Showing posts with label Taxes. Show all posts
Showing posts with label Taxes. Show all posts
Thursday, June 9, 2011
Friday, December 3, 2010
Deficit Commission Report Fails
My Facebook page has been alive with comments from Realtors and those in the real estate profession about the Deficit Commission Report that proposes, among other things, to eliminate the mortgage interest deduction (MID) for taxpayers. As the tax code now reads, interest paid on mortgage loans is deductible from income in calculating income tax. Real estate professionals are afraid that, if the MID is eliminated, the real estate industry will crumble.
Fears that the sky is falling are premature. The report failed to gain enough votes from the Congressional committee to advance to Congress as a whole. It received 11 votes, three shy of the 14 needed for advancement. While any of the proposals in the report could be considered piecemeal, its rejection assures that the entire report will not be voted on.
In addition to eliminating the MID, the report also called for changes to Medicare, freezes on federal salaries, an increase in the federal gas tax and raising the retirement age for Social Security. If France is any indication, the last will be wildly unpopular.
Fears that the sky is falling are premature. The report failed to gain enough votes from the Congressional committee to advance to Congress as a whole. It received 11 votes, three shy of the 14 needed for advancement. While any of the proposals in the report could be considered piecemeal, its rejection assures that the entire report will not be voted on.
In addition to eliminating the MID, the report also called for changes to Medicare, freezes on federal salaries, an increase in the federal gas tax and raising the retirement age for Social Security. If France is any indication, the last will be wildly unpopular.
Wednesday, June 17, 2009
Death and Taxes
To many people, estate planning is all about avoiding the estate and inheritance tax. That's why a lot of people give little thought to estate planning, because, as we've discussed, they don't consider themselves wealthy enough to have to worry about estate taxes. We discussed why estate planning is important even aside from taxes, but today we are discussing estate taxes.
There is a lifetime exemption amount for estate taxes. It's a combined estate and gift tax exemption, so to the extent that the exemption is used to give gifts tax free during life, it isn't available at death. But putting that aside, right now (2009) the estate tax exemption is $3.5 million. In 2010, the estate tax is slated to go away altogether. But Congress will probably renew it in 2011 and later, and there is talk that the exemption will be scaled back to the $1 million it was under the Clinton Administration.
Everything that you own at your death is included in your estate. This means all land (houses, rental properties, vacant land, vacation homes, etc.), bank accounts, CDs, stocks, bonds, vehicles, computers, everything down to your china and silverware. Even in today's depressed market, if you have a home, with everything else included, you could be bumping up against the $1 million mark. If that's the case, keep a close eye on the estate tax debates. And if you're up over $1 million, you definitely need to talk to an estate planning attorney.
Of course, everyone should have basic estate planning documents: will, durable power of attorney, and living will (medical directive).
There is a lifetime exemption amount for estate taxes. It's a combined estate and gift tax exemption, so to the extent that the exemption is used to give gifts tax free during life, it isn't available at death. But putting that aside, right now (2009) the estate tax exemption is $3.5 million. In 2010, the estate tax is slated to go away altogether. But Congress will probably renew it in 2011 and later, and there is talk that the exemption will be scaled back to the $1 million it was under the Clinton Administration.
Everything that you own at your death is included in your estate. This means all land (houses, rental properties, vacant land, vacation homes, etc.), bank accounts, CDs, stocks, bonds, vehicles, computers, everything down to your china and silverware. Even in today's depressed market, if you have a home, with everything else included, you could be bumping up against the $1 million mark. If that's the case, keep a close eye on the estate tax debates. And if you're up over $1 million, you definitely need to talk to an estate planning attorney.
Of course, everyone should have basic estate planning documents: will, durable power of attorney, and living will (medical directive).
Wednesday, March 4, 2009
Obama's Budget Proposal
We got a first look at President Obama's proposed budget this past weekend. There are good and bad things in it. And a couple of really bad things.
An earlier post questioned what would happen with the estate tax, assuming it was retained and didn't expire as the Bush Administration had proposed. As expected, the Obama Administration intends to keep the estate tax. But there is a silver lining: the exclusion will remain at $3.5 million instead of reverting to $1 million as it was under President Clinton. Small business owners wanted a complete repeal, but the $3.5 million exclusion should ease some of their pain.
Also a good point is an annual adjustment to keep the Alternative Minimum Tax (AMT) from biting more people whose incomes have crept up due to cost of living increases. That's a good thing.
Tax rates in general will increase. The highest marginal rate is increasing from 35% to 39.6%. That's bad. And along with that is the ultimate "marriage penalty". These higher rates kick in at $200,000 for an individual, but $250,000 for a married couple.
Some really bad news and a surprise is the proposal to limit deductions at 28%. What this means is if you are in the higher tax brackets, a $1,000 charitable contribution, for example, is only worth $280 (28%) instead of the $396 (39.6%) of your tax bracket. This comes as a surprise and attacks a very sacred cow, that of the deductibility of mortgage interest. For years tax policy has encouraged home ownership by allowing a deduction for mortgage interest. Now that and all deductions would be limited.
It's important to remember that these are all just proposals. The President's budget has to be approved by Congress and there could be a fight to get it through.
An earlier post questioned what would happen with the estate tax, assuming it was retained and didn't expire as the Bush Administration had proposed. As expected, the Obama Administration intends to keep the estate tax. But there is a silver lining: the exclusion will remain at $3.5 million instead of reverting to $1 million as it was under President Clinton. Small business owners wanted a complete repeal, but the $3.5 million exclusion should ease some of their pain.
Also a good point is an annual adjustment to keep the Alternative Minimum Tax (AMT) from biting more people whose incomes have crept up due to cost of living increases. That's a good thing.
Tax rates in general will increase. The highest marginal rate is increasing from 35% to 39.6%. That's bad. And along with that is the ultimate "marriage penalty". These higher rates kick in at $200,000 for an individual, but $250,000 for a married couple.
Some really bad news and a surprise is the proposal to limit deductions at 28%. What this means is if you are in the higher tax brackets, a $1,000 charitable contribution, for example, is only worth $280 (28%) instead of the $396 (39.6%) of your tax bracket. This comes as a surprise and attacks a very sacred cow, that of the deductibility of mortgage interest. For years tax policy has encouraged home ownership by allowing a deduction for mortgage interest. Now that and all deductions would be limited.
It's important to remember that these are all just proposals. The President's budget has to be approved by Congress and there could be a fight to get it through.
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