What is Income Taxation Of Bankrupt Individuals?
When an individual files for a Chapter 7 or Chapter 11 bankruptcy, he/she will create an entirely separate taxable entity known as the bankruptcy estate. This estate consists of assets owned by the individual prior to his/her bankruptcy and is usually managed by a court appointed trustee or fiduciary. What Happens If the Bankruptcy Petition Does Not Get Approved By The Courts?If the bankruptcy petition does not get approved, then no bankruptcy estate is created. What Does "Separate Taxable Entity" Mean?This means that the bankruptcy estate created from the bankruptcy will have its own tax liabilities and tax return filing responsibilities separate from the individual¿s own liabilities and responsibilities. Usually, the trustee or the fiduciary will be responsible for the tax filing requirements for the bankruptcy estate. The bankruptcy estate comes into existence the day when the bankruptcy proceedings commence. Between the time the proceedings are initiated and the time they are completed, the bankruptcy estate may generate income and expenses. Income tax is imposed on the bankruptcy estate if it has taxable income after deducting its expenses and its standard deductions. How Is Income Tax For A Bankruptcy Estate Calculated?Income tax calculation for a bankruptcy estate is the same as the calculation for an individual taxpayer. The only difference is that a bankruptcy estate can only use the standard deduction for a married individual filing a separate return. Does The Home Sale Exclusion Apply To A Bankruptcy Estate?Yes. A bankruptcy estate selling a qualified principal residence will enjoy the same home sale exclusion as an individual taxpayer would. Thus, if the bankruptcy estate needs to sell an appreciated home in order to settle its liabilities, it will be entitled to exclude part of the resulting gain from tax if the home qualifies as a principal residence. Are Transfers Of Property Between the Bankruptcy Estate And The Bankrupt Individual Considered Sales or Exchanges Subject To Tax? No. Property is transferred (not sold or exchanged for money or other property) into or out of the bankruptcy estate by the bankrupt individual will not result in any taxable gain or loss to either party. What Happens If The Bankruptcy Estate Has A Net Loss? When the expenses of the bankruptcy estate exceed the income that it generates, the loss is called excessive administrative cost and may be carried back to offset income of the bankruptcy estate in prior tax years (if exist) and the income of the bankrupt individual in the year prior to the bankruptcy proceedings. Do I Need an Attorney to Help Me with My Tax Problems? Tax laws are complex and ever-changing. Although there are various tax preparation softwares on the market that may help you with your tax problems, they cannot provide the same level of service that an experienced and knowledgeable tax attorney can. If you are unsure about your tax responsibilities or you need someone to represent you before the IRS, a tax attorney can help you. |
