You, as the individual debtor, generally must file income tax returns during the period of the bankruptcy proceedings. Do not include on your return, the income, deductions, or credits belonging to the separate bankruptcy estate. Also do not include as income on your return, the debts canceled because of bankruptcy. However, the bankruptcy estate must reduce certain losses, credits, and the basis in property (to the extent of these items) by the amount of canceled debt. See Debt Cancellation.
You have the option of ending your tax year on the day before you filed your bankruptcy petition. This allows the tax due on that short period return to be a claim against the bankruptcy estate. See Election to End Tax Year.
See Tax Procedures, for information about determining and paying the amount of tax due.
Tax attributes. Certain deduction and credit carryovers and decisions that you made in earlier years are taken over by the bankruptcy estate when you file for bankruptcy. These include carryovers of deductions, losses, and credits, your method of accounting, and the basis and holding period of assets. These are referred to as tax attributes.
When the estate is terminated, you assume any remaining tax attributes that were taken over by the estate and generally assume any attributes arising during the administration of the estate. See Attribute carryovers, under The Bankruptcy Estate, for a list of attributes. Also, see Administrative expenses under The Bankruptcy Estate for a limitation.
Disclosure of return information. The bankruptcy estate's income tax returns are open, upon written request, to inspection by or disclosure to you the individual debtor. The disclosure is necessary so that you can properly figure the amount and nature of the tax attributes, if any, that you must assume when the bankruptcy estate is terminated.
In addition, your income tax returns for the year the bankruptcy case begins and for earlier years are open to inspection by or disclosure to the bankruptcy estate's trustee. See Disclosure of return information, under The Bankruptcy Estate.
Transfer of assets to the estate. Bankruptcy law determines which of your assets become part of the bankruptcy estate. Generally, all of your legal and equitable interests become property of the estate. However, you may "exempt" certain property from the estate.
A transfer (other than by sale or exchange) of an asset from you to the bankruptcy estate is not treated as a "disposition" for income tax purposes. This means that the transfer does not result in gain or loss, recapture of deductions or credits, or acceleration of income or deductions. For example, the transfer of an installment obligation to the estate would not accelerate gain under the rules for reporting installment sales.
If you receive any assets from the bankruptcy estate when it terminates, do not treat the transfer as a taxable disposition. You treat these assets the same as the bankruptcy estate would have treated them. This includes using the same basis, holding period, and character of the assets as the bankruptcy estate did before it was terminated.
Abandonments. If you receive abandoned property from the estate, you receive the same basis in the property that the estate had.
Carrybacks from your activities. As the individual debtor, you cannot carry back any net operating loss or credit carryback from a tax year ending after the bankruptcy case has begun to any tax year ending before the case began. The estate, however, can carry the loss back to offset your pre-bankruptcy income.
Individuals in Chapter 7 or 11
- Responsibilities of the Individual Debtor
- Election to End Tax Year
- The Bankruptcy Estate
- Return Requirements and Payment of Tax
- Example.
Information courtesy of the Internal Revenue Service.
