Can I Reduce My Tax Withholdings to Avoid Paying the Trustee?

07 Feb Can I Reduce My Tax Withholdings to Avoid Paying the Trustee?

The bankruptcy estate is entitled to a percentage of the refund the debtor expects to receive in the year in which the bankruptcy case is filed. That percentage is equal to the number of days from January 1st until the filing date divided by 365. Of course it is best for the debtor if there is no refund for the trustee to take.

EXAMPLE: Sam and Mary file a joint bankruptcy on August 15, 2007. August 15th is the 227th day of the year. When they file their 2007 federal income tax return in 2008, the estate will be entitled to 227/365ths or about 62% of the refund.

STRATEGY: If Sam and Mary contemplate filing a bankruptcy in the second half of the calendar year, and they anticipate a refund in the current filing year, they can change their federal income tax withholdings to reduce the likelihood of a year end refund. This makes perfectly good business sense whether or not bankruptcy is contemplated since there is no good reason to allow the federal government to earn interest on the overpayment of taxes. The taxpayer should be earning the interest. See this recent article by Marshall Loeb of MarketWatch.

Keep in mind that this strategy should be discussed with your bankruptcy attorney because the application of bankruptcy laws vary in different districts.

See also Tax Refunds as Assets, What happens to Non-filing Spouse’s Tax Refund?, and Get Your Tax Refund Before You File Bankruptcy.

Copyright Chip Parker. All rights reserved.

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Chip Parker is the managing partner of Parker & DuFresne, P.A., where he represents Northeast Florida businesses and consumers facing bankruptcy, and homeowners facing foreclosure. His firm files more homeowners in the Mortgage Modification Mediation Program than any other law firm in Northeast Florida. Parker is the recipient of Jacksonville Area Legal Aid's prestigious Award for Outstanding Pro Bono Service. Mr. Parker is an active member of the National Association of Consumer Bankruptcy Attorneys and National Association of Consumer Advocates.
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