Law Office of Robert L. Firth
Including Current-Year Income Taxes in Your Chapter 13 Case
If you expect to owe taxes for 2015, either wait until after the end of the year or do a partial-year tax return now and file Chapter 13.
If you owe income taxes for last year—2015—you may again owe for 2016. You may again have not been able afford to have enough taxes withheld from your paycheck to make ends meet. Or if you’re self-employed, the money just wasn’t there when it came time to pay enough in estimated quarterly taxes.
So you’re worried about owing another chunk of taxes next April for this year’s taxes. And that’s on top of your already overwhelming debts. How do you deal with the upcoming taxes in the middle of all your other pressures?
This Challenge in a Chapter 13 Case
Chapter 13 can be a great tool for taking care of income tax debts. It can be especially good for covering multiple tax years. That’s because it deals well with both older taxes that you can “discharge”—write off—and newer ones that you must still pay. You get major advantages with the taxes you have to pay. The payment terms are usually much more flexible. Interest and penalties usually stop accruing. Throughout the payment period you’re protected from the IRS and/or state tax authority—no fear of paycheck garnishment or tax liens on your home.
But bankruptcy—including Chapter 13—deals only with debts you owe at the time your case is filed. It doesn’t include future debts. You propose and the court approves a Chapter 13 payment plan that addresses debts you owe at the time you file your case. That plan would be jeopardized if you’re hit with a big tax bill next April 15.
There are solutions for this.
There’s one easy way to include the current year’s income taxes in your upcoming Chapter 13 payment plan. That’s to wait until after the very beginning of next year to file your case. You won’t know the exact amount of taxes owed until you prepare your tax return. But even without knowing the amount, that tax will be included as long as you file the Chapter 13 case after December 31.
But that won’t work if you have serious debt pressures pushing you to get relief now. If so, consider filing a partial-year income tax return. You may be able to submit a tax return covering the year up until your Chapter 13 filing date. The taxes you owe up until that point would be included in your case. Then you’d file another partial-year tax return after the end of the year to cover the remaining part of the year. Your Chapter 13 budget would earmark enough money for appropriate tax withholding or estimated tax payments. So you shouldn’t owe any more taxes from that remaining portion of the year.
A final possibility works especially if the amount you expect to owe for the current year is not particularly large. Just file a Chapter 13 whenever you need to. At the same time carefully calculate your current year tax debt amount as of that point. Get the help of a tax professional if necessary. Then have your bankruptcy lawyer make room in your Chapter 13 budget for installment payments on that current-year tax after you file your tax return.
Simple Examples of the 3 Options
Assume that you determine that you will owe $1,500 for the current year. Here are the three options:
- Wait to file your Chapter 13 case until after December 31 and pay that tax through your payment plan. Get all the benefits of doing so. Besides the ones mentioned above, paying that $1,500 in your Chapter 13 plan may reduce what you pay other creditors by that amount.
- Submit a partial-year tax return, showing the $1,500 amount owed. File your Chapter 13 case at that same time, getting the benefits stated above. Avoid owing taxes for the remaining part of the year through appropriate budgeting and withholding/paying estimated taxes.
- File your Chapter 13 now. Earmark $100 payments to the IRS/state in your budget for about 16 months, including interest and penalties. That should justify reducing your monthly Chapter 13 plan payments by $100 during those months. That may allow you to reduce what other creditors receive through the plan. Or it may require you to pay longer to make up for your reduced plan payments, and to pay what you must pay to complete the case.
Chapter 13 doesn’t just solve your past income tax debts. With these options it can deal with your current-year tax debt as well.