If you have filed a bankruptcy, or are considering filing a bankruptcy, you may find yourself wondering if there is anything different you would need to do when filing your tax returns following a bankruptcy filing. In most cases, the answer is no, but in some cases, there may be an extra form that you might need to file.
What Does and Doesn't Gross Income Include?
Pursuant to 26 US Code Section 108(A)(1)(a), gross income does not include income attributable to a discharge of debt received as a result of a bankruptcy filing. In other words, receiving a bankruptcy discharge is not a “taxable event.” As such, filing a bankruptcy alone does not create the need to consider any extra income or provide any extra information/forms when preparing your tax returns. However, in some instances, even after a bankruptcy filing, there may be a need to file an extra form with your tax returns.
How Can Taxable Income Be Created During Bankruptcy Discharge?
Although a bankruptcy discharge does not create income for the debtor, there are ways that the actions of creditors and/or even individuals can create taxable income. For example, creditors may choose to “charge off,” cancel, or forgive an individual’s indebtedness, and upon making that decision, create “income” for the debtor. In other cases, an individual may choose to settle his/her debt, but then ultimately decide to file a bankruptcy after doing so. In each of those instances, the creditors will likely send the debtor a 1099 for the income, which would also be sent to the IRS.
What Is Form 982 in Minnesota?
An individual that receives a 1099 form after filing a bankruptcy should file what is called Form 982 with their tax returns. The Form 982 indicates that a bankruptcy discharge was received, so the income on the 1099 is negated by the bankruptcy discharge. Filing this form is important because without it, the taxing authorities would calculate a larger than appropriate tax obligation for the year in which the 1099 was received. The form can be found on our website.
CALL NOW FOR A FREE STRATEGY SESSION FROM A MN BANKRUPTCY LAWYER AT LIFEBACK LAW FIRM
If you are currently contemplating a bankruptcy filing and have questions regarding the information above, please do not hesitate to reach out to Minnesota’s nicest bankruptcy law firm at LifeBackLaw.com for a free consultation and advice regarding how the bankruptcy can affect your tax filing. We look forward to hearing from you and helping you get rid of your debt and get your life back.
