Income tax refunds are part of the Chapter 7 debtor’s bankruptcy estate. Debtors who file Chapter 7 bankruptcy during the first four months of the calendar year and in November or December of the proceeding year should expect the Chapter 7 trustee to inquire about their anticipated income tax refund. In most cases, the debtor must agree in writing to send a copy of yet unfiled tax returns to the trustee and to hold any refund received until the trustee decides whether or not the refund is significant enough to administer for the creditors’ benefit. Chapter 7 debtors can exclude or exempt whatever part of an income tax refund is attributable to the earned income tax credit. Most Chapter 7 debtors have low amounts of income relative to their family size, and therefore, many debtors received some EITC as part of a tax refund. Florida statutes exempt the EITC from creditors. The Chapter 7 trustee cannot take whatever part of a debtor’s tax refund which represents the EITC.
The IRS also gives taxpayers a income credit for based on amount of dependent children in the family. The child tax credit is $1,000 per dependent child. The child tax credit is not exempt under Florida statutes and is not exempt in bankruptcy. Debtor’s cannot protect from a trustee that part of their tax refund related to the child tax credit.
Be careful to distinguish between the earned income tax credit and the child tax credit when evaluating the amount of tax refund which will be taken by a trustee in your Chapter 7 bankruptcy.