When you file bankruptcy, any income tax refunds payable to you become part of your bankruptcy estate. If part of your tax refund is comprised of an earned income tax credit (EITC), you may be able to exempt some or all of the EITC in your bankruptcy case, depending on what state you live in. Read on to find out more.
Tax Refunds in Bankruptcy
Income tax refunds are usually considered part of a debtor's bankruptcy estate. If you file a Chapter 7, this means that the refund could be seized by your bankruptcy trustee. In a Chapter 13, the refund will be included in the valuation of your bankruptcy estate for the purpose of calculating your Chapter 13 plan. You may also have to turn over tax refunds as part of your Chapter 13 plan funding, depending on your case.
However, you may be able to protect your refund by using exemptions. The exemptions you have available may offer partial protection ore even full protection, depending on what your state's exemption laws say.
Exemptions: Federal vs. State
Like any other asset in bankruptcy, you may be able to claim exemptions to keep all or part of your EITC tax refund. The type and amount of exemptions you can apply against the EITC refund will depend on the laws of your state, and the type of exemption scheme that you have opted to use:
- federal bankruptcy exemptions, or
- state bankruptcy exemptions.
To learn how exemptions work, and to find the applicable exemptions in your state, visit our Bankruptcy Exemptions topic area.
If you live in a state that allows you to use the federal bankruptcy exemptions, and you have opted to use them to protect other assets (for example, to take advantage of doubling exemptions to cover your home equity), your refund will be least protected. That is because the federal bankruptcy exemptions do not specifically protect tax refunds that arise from EITC. Instead, you are are limited to the standard exemptions. For example, you can use:
- the wildcard exemption of up to $1,225, and
- up to $11,500 of any unused portion of your available homestead exemption.
Those standard exemptions may not protect the full value of your refund, especially if you have already used all or a portion of those exemptions on other property you own.
If you choose to use your state exemptions, or your state requires that you use state exemptions, you might have better protection. Your EITC may even be exempt in full. For example, Indiana and Florida have laws that specifically protect EITC refunds in full. That means you get to keep your EITC in your bankruptcy. In other states you may be able to protect an EITC refund with a wildcard.
(Learn more about how the wildcard exemption works in bankruptcy.)
Caution: Child Tax Credit
This article addresses refunds traceable to EITC. If part of your refund is based upon the state or federal child tax credits, then that amount may not be similarly exempt in bankruptcy. Ultimately, it will depend on whether the laws of your state that protect EITC also exempt refunds arising from state or federal child tax credits. For example, if you live in Florida, you may exempt your entire EITC. However, Florida law does not exempt child tax credit. The amount of your refund traceable to the child tax credit will still be included in your bankruptcy case and is potentially subject to seizure by your bankruptcy trustee, to the extent that you cannot apply other available exemptions against it.