It’s tax season again, and with the economy still struggling, many Americans are opting to do their own taxes rather than paying professionals to do it. That’s a lot easier said than done though. Although we do not tax attorneys here at The Dellutri Law Group, our attorneys must deal with tax-related issues on a regular basis, because such issues are irretrievably intertwined with bankruptcy issues.
Around this time of year, the bulk of the questions we get from potential bankruptcy clients are all about their tax returns, and one of the most popular is about Earned Income Credit. Basically, Earned Income Credit (EIC) is a tax credit you may be eligible to receive, depending on your circumstances. If you qualify under the IRS requirements, the actual amount of EIC will vary depending on exactly how much you make, and how many dependents you’re responsible for supporting. The credit will offset any taxes that are owed, and if you don’t owe taxes, the amount of the credit will be added to your refund.
As you might have guessed, as with everything else, the IRS has a lengthy set of rules used to determine who is eligible for the EIC and for what amount. If you have children, there’s a laundry list of criteria that those children must meet to be considered “qualifying children.” Because EIC can potentially add up to $5,891 to your tax refund (the maximum EIC for 2012 – for individuals or couples with three or more qualifying children), it’s definitely worth investigating to see if you qualify. Check out the EIC guidelines here or ask your tax professional.
For bankruptcy purposes, the most important thing to know about EIC is that it doesn’t have to be surrendered to the bankruptcy trustee. Depending on what kind of bankruptcy you file and when you file it, it’s not at all unusual for the bankruptcy trustee to demand turnover of all or part of your tax refund. Parting with all or a portion of the tax refund is particularly disconcerting to bankruptcy debtors who were counting on that money to pay some upcoming necessary expenses that they’d otherwise be unable to cover in bankruptcy. However, if you file for bankruptcy with a $5,000 tax refund on the way, and $4,000 of that refund is attributable to EIC, the trustee can only demand turnover of a maximum of $1,000. The rest of the refund is protected free and clear--without having to use personal property exemptions. In the bankruptcy world, that’s a big deal!
If you have any other questions about your tax refund, bankruptcy exemptions, or bankruptcy in general, please feel free to call our office at (800) 391-4337 and set up a free consultation. And if you know someone who may need our assistance, please feel free to pass along this blog to them. The Dellutri Law Group has been built on referrals from satisfied clients, and we intend to keep it that way.