Attorney Ed WoodsIncome tax refund season is right around the corner. Many Americans have come to rely on their tax refunds to help out with the basic necessities of life such as clothing, utility services, and needed medications. If you are facing that situation and struggling to make ends meet, you may be thinking about the possibility of filing a bankruptcy case to address your situation. You may be wondering whether you will lose your income tax refund if you do decide to file a bankruptcy case. And that is a legitimate concern. Especially if you rely heavily on your tax refund, you need to know how filing a bankruptcy case will impact your receipt of or the amount of your tax refund.

Exemption Laws

The question of what happens to your tax refund if you file a bankruptcy case depends on the “exemption” laws of your state in most instances or upon the “exemption” provisions of the federal bankruptcy law. When you file a bankruptcy case, certain types of property that you own can (and must) be claimed as “exempt”. Once something is properly claimed as exempt, it is pulled out of your bankruptcy case and you are entitled to keep it. So, you want as much of your property as possible to be exempt. Your tax refund is considered part of your property just like your car or the furniture in your home.

Mississippi Tax Exemption Laws

The determination of exactly what is “exempt” is governed by state law in thirty-two (32) states and by the federal bankruptcy law in the remaining eighteen (18) states. If you live in a state that applies the exemptions found in the federal bankruptcy law, you can utilize the “wildcard” exemption of that law to exempt up to $1,225.00 per debtor of tax refunds. In Mississippi, the determination of exactly what property is exempt is determined by Mississippi state law. Mississippi Code Section 85-3-1(i) provides that “[a]n amount not to exceed Five Thousand Dollars ($5,000.00) of earned income tax credit proceeds [are exempt]”. Mississippi Code Section 85-3-1(j) applies the same exemption to $5,000.00 of federal tax refund proceeds and Mississippi Code Section 85-3-1(k) applies the same exemption to $5,000.00 of state tax refund proceeds. Married couples filing jointly can each claim these amounts which doubles the amount of the exemption.

So, in Mississippi, a single individual filing a bankruptcy case is able to keep up to $5,000.00 in federal, state, and earned income credit tax refund proceeds. This individual is free to use these tax refund proceeds in any manner that he or she wishes. But what if the amount of the tax refund proceeds exceeds the exemption amount? In such a circumstance, the excess above the allowed exempt amount is part of the bankruptcy case and can be used to pay creditors.

If you are thinking about filing a bankruptcy case and you anticipate that your tax refund will exceed the exempt amount in your state, you should make your bankruptcy lawyer aware of this fact. If your situation permits, some advance planning may be beneficial to you. One way that you could avoid losing the non-exempt portion of your tax refund would be to adjust the withholding on your paycheck so that your tax refund would come under the exemption amount. Or perhaps the careful timing of the date you intend to file your case might be beneficial to you.

As with any significant legal decision, make sure that you consult with a reputable and experienced lawyer to advise you in this matter. The impact of a bankruptcy case filing upon your tax refunds varies widely from state to state. The lawyers in our firm have many years of experience in guiding you through a financial crisis. We’re here to help you.


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Ed Woods
Written by Ed Woods

Ed Woods is the Managing Attorney of several of the Bond & Botes Law Offices throughout Mississippi. He holds a Bachelor of Science from the University of Southern Mississippi, and a Juris Doctorate from Mississippi College School of Law. Ed puts his extensive knowledge of bankruptcy law to use defending consumers from debt collection lawsuits and more. Read his full bio here.

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