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Debt solutions can impact your tax situation in many ways, including ways you may not expect. If you are considering filing for bankruptcy to solve debt problems, it’s important to understand how bankruptcy may affect your tax status. A bankruptcy attorney in Las Vegas can help you understand the potential tax consequences of filing.
Tax Consequences of Bankruptcy
Filing for bankruptcy usually has fewer tax consequences than other forms of debt relief. For example, agreeing to a debt settlement with a creditor and reducing debt means the IRS will consider the forgiven amount as income and you will need to pay taxes on it. Canceled debts of many types become taxable income to the IRS and you will likely receive a 1099-C from a lender.
This is not the case in bankruptcy. If you receive a 1099-C form from a creditor claiming you earned income on discharged debt from your bankruptcy after your case is over, you should simply file a 982 form to inform the IRS that the debt was discharged, not forgiven.
To benefit from this exclusion of debts discharged in bankruptcy, you must file bankruptcy before you receive a 1099-C form from a creditor or lender. This is because bankruptcy can only discharge debt, not “income.”
Bankruptcy & IRS Debt
In some cases, bankruptcy can reduce or eliminate some forms of IRS tax debt as long as you meet certain qualifications. Still, the IRS can audit your return, make tax assessments, and demand that you file tax returns. Filing for bankruptcy will not erase recent tax debt nor eliminate your need to pay any taxes you owe for the year in which you file or subsequent years.
How Bankruptcy May Affect Your Tax Return
There are some ways in which filing for bankruptcy can affect your taxes, including the deductions and tax credits you may be able to claim. In some cases, filing for bankruptcy means you cannot take deductions and credits for which you would otherwise qualify.
If you excluded the amount of discharged debt from your income, for example, that amount must be used to reduce certain tax credits and deductions in a specific order:
- Net operating losses from a business
- General business credit carryovers
- Minimum tax credits
- Capital losses on investments
- Basis of property
- Passive activity loss or credit carryovers
- Foreign tax credit|
Contact a Bankruptcy Lawyer in Las Vegas
Deciding whether you should file bankruptcy is a difficult decision, but considering the many ways in which your taxes are affected can make it even harder. An experienced Nevada bankruptcy lawyer can answer any questions you may have while discussing the options available to you. Contact Las Vegas Bankruptcy Lawyers for a free consultation with a bankruptcy attorney in Las Vegas, NV to go over your options.