Bankruptcy Timing and the Holidays: Filing in 2016 to Cover More Income Taxes

 Posted on December 30, 2015 in Income Taxes

During the first months of 2016 your bankruptcy can write off more of your tax debts.

Filing bankruptcy at the right time in 2016 can help you deal with income tax debts in two main ways:

• Discharging (legally writing off) more of your tax debts (likely for the 2012 tax year), under a Chapter 7 “straight bankruptcy” or a Chapter 13 “adjustment of debts”
• Including any taxes owed for the 2015 tax year in your Chapter 13 payment plan, with the advantages that provides

Today we’ll show the first step to this—how to write off more income taxes under Chapter 7 in 2016. We’ll cover the rest during the first days of this coming year.

Discharge of More Income Tax under Chapter 7

The most direct way bankruptcy can help with taxes is through a Chapter 7 case to discharge—permanently write-off—of one or more tax year that you owe. That way you would not legally owe the tax at all usually within less than 4 months after filing the bankruptcy case.

You can in most situations discharge older income taxes through Chapter 7 by meeting the following two conditions. The date of the bankruptcy filing must be both:

1) at least 3 years after the pertinent tax return was due (plus any time for extensions), and

2) at least 2 years after the tax return was actually submitted to the IRS or state tax agency.

(There are some other possible conditions but practically speaking these seldom come into play.)

Income Taxes Owed for 2012

Relevant to now, if you owe income taxes for the 2012 tax year you would meet the first of the above two conditions by waiting to file your Chapter 7 case until after April 15, 2016. That’s because at that point 3 years would have passed since that tax return was due.

This assumes you were not granted an extension to file that tax return. If an extension to file the return was granted to October 15, 2013, you’d have to wait to file the Chapter 7 case until after October 15, 2016 to meet this 3-year rule.

As to the second of the above two conditions, you’d meet it by waiting to file your Chapter 7 case until at least 2 years had passed since you submitted your 2012 tax return to the IRS/state. If you filed that return by the (non-extended) due date of April 15, 2013 then you would have already met this 2-year condition in April of last year. But you could have submitted the tax return a full year late—by April 15, 2014—and still meet this 2-year condition.

A Simple Example

If you owed, say, $5,000 to the IRS for 2012 income taxes, did not get an extension for that tax return, submitted the tax return to the IRS on or before April 15, 2014, and then filed a Chapter 7 case after April 15, 2016, that $5,000 tax debt would very likely be permanently gone—discharged—by about the middle of the year. You would simply not legally owe it any more, and the IRS could do nothing to try to collect it.

(Next week we’ll show how these principles apply to Chapter 13—if you need its special advantages for some reason—and also how waiting to file a Chapter 13 case until early 2016 can help with 2015 income taxes.)