Around this time each year my bankruptcy clients routinely ask if they will be able to keep their tax refunds when they file for bankruptcy. The answer is complex, and depends on the type of bankruptcy they file. Generally, a debtor can keep up to $2,500 in cash and cash equivalents that they have as of the date on which they file for bankruptcy – that includes cash, checking and savings accounts, and tax refunds that are due. In a Chapter 13, debtors usually are required in New York to give up their tax refunds during the life of the case unless they are repaying their debts in full.
But the bigger question is this – why are you getting a big tax refund?
People don’t realize that a tax refund is just a return of money that you’ve overpaid to Uncle Sam during the course of the year. In fact, a recent article on MarketWatch.com correctly calls your overpayment an interest-free loan to the U.S. government.
Think about it. Each week (or whenever you get paid) the government holds back a certain amount of money. At the end of the year when you file your tax returns, they re-calculate the amount they should have held back and, if they’ve taken too much, they give you back the balance. In other words, you’re giving them your money – money you could be using for other, more important things – and they aren’t giving you back any interest. Get a $3,000 tax refund? That’s great, but if you put it into a savings account you wold have made some money on it. From the article:
The amount you pay each year in income taxes is determined by your payroll withholding — that is, the money removed from your paycheck to cover your taxes. You can adjust the amount that is withheld each pay period by resubmitting a W-4 form to your employer. If you get a big refund check each year, increase the number of personal exemptions you take.
On the other hand, if you have to fork over a big check to the IRS each year, that means you’re not having enough withheld and you should decrease the number of personal exemptions on the W-4.
If you’re not sure how many exemptions to take, there is a worksheet on the back of the W-4, but that can be confusing. The IRS offers a simpler withholding calculator on its Web site that can tell you how many exemptions to take based on your pay and your personal situation. To use the calculator, visit www.irs.gov and search for “withholding calculator.” A qualified tax preparer can also help you complete the form. Check out the IRS calculator.
While you probably completed your W-4 when you first started working for an employer, you can adjust it any time. Just ask for a new form from your employer’s payroll department or download one from the IRS Web site.
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