Publication 908: Bankruptcy Tax Guide

Publication 908, also referred to as Pub. 908, is a resource offered by the Internal Revenue Service (IRS) to explain the federal income tax implications of bankruptcy. It provides basic information on how bankruptcy proceedings affect your tax filing obligations and tax treatment of discharged debt.

Purpose of Pub. 908

This guide is designed to help individuals understand the tax consequences of filing for bankruptcy under Chapters 7 and 11. It clarifies how debt cancellation is treated by the IRS and what income might be generated by the bankruptcy estate. Pub. 908 does not delve into the intricacies of bankruptcy law itself but focuses solely on the tax aspects.

Who Should Read Pub. 908?

  • Individuals considering filing for bankruptcy under Chapter 7 or Chapter 13 (the most common chapters).
  • Bankruptcy trustees or professionals assisting individuals with bankruptcy proceedings.

What types of bankruptcy are covered?

Pub. 908 primarily addresses Chapters 7 (liquidation) and 11 (reorganization) of the Bankruptcy Code.

What happens to discharged debt?

When a debt is discharged in bankruptcy (Chapter 7 typically), the forgiven amount may be considered taxable income by the IRS. However, there are exceptions. Pub. 908 explains how to determine if the debt discharge is excluded from income due to insolvency or bankruptcy.

What is a bankruptcy estate?

Upon filing for bankruptcy, a legal entity called the "bankruptcy estate" is created. This estate holds the debtor's assets intended for distribution to creditors. Pub. 908 clarifies the tax filing requirements for bankruptcy estates, including the minimum income threshold for filing a tax return.

Can I deduct bankruptcy fees?

Legal and administrative fees incurred during the bankruptcy process are generally deductible as miscellaneous itemized deductions on your tax return, subject to certain limitations outlined in Pub. 908.

What about tax refunds after filing for bankruptcy?

Tax refunds received before the bankruptcy filing belong to the debtor. However, refunds generated after the filing date become property of the bankruptcy estate. Pub. 908 explains how to handle tax refunds in such scenarios.

How does bankruptcy affect future tax returns?

While filing for bankruptcy generally doesn't impact future tax filing obligations, any income generated post-bankruptcy is taxable as usual. Pub. 908 emphasizes the importance of maintaining accurate tax records even during bankruptcy proceedings.