Earning individuals in the United States are required to pay taxes to the state and the federal government. Most of us have seen a paycheck with a reduced balance and have wondered where that money is off to. In most cases, the money collected from taxes is used to pay for the government institutions and public areas such as libraries and parks. In fact, taxes are used by the government to pay for the following:

  • Social Security Benefits - Welfare and medical care
  • Public School Funding
  • Highways, roads, sidewalks
  • Immigration Services
  • The U.S Military- Army, Marine, Navy, Airforce and soon to be Space Force
  • Government employees- DMV, IRS, US Postal Service, police officers, and firefighters etc.

Your taxes are used to pay for a variety of services that often go unnoticed. The tax system is an essential component of our middle class and it is our obligation to pay for public services. Every earning individual is required to pay the following if they are working in the state of California:

Federal Taxes: taxes paid to the Internal Revenue Service which is used to fund the programs mentioned above.

Social Security: also known as the Old Age, Survivors, and Disability Insurance (OASDI) which benefits disabled workers, survivors, and their dependents.

Medicare: provides medical coverage for older and/or disabled individuals.

State Taxes: used to pay local public, education, health, and welfare systems and to provide disability insurance for disabled workers including paid leave for the sick and the pregnant.

When we fail to pay our taxes to Uncle Sam, the government may take certain actions including wage garnishments and establish a lien on your property. To avoid coming into contact with a federal tax debt collection, you will want to make sure to pay your taxes on time. However, if you are facing tough economic times, there are several things you can do to address your tax debt.

First and foremost, you are encouraged to contact the IRS before you are late on any payment or you are late on filing your taxes. The Internal Revenue Service (IRS) may give you several months to catch up with your tax obligations. For instance, if taxes are due in April, you may be able to buy time until October by requesting an extension. An extension can be used to file your taxes late or to make certain late payments. The best thing you can do to avoid an IRS debt collecting action is to let them know beforehand if you will need more time to pay off or file your taxes. In some cases, individuals who are facing hard economic times may only need a couple of months to get back on their feet. The IRS understands that sometimes an extension can greatly help working individuals.

On the other hand, debtors that are going through hard economic times, especially those who experienced a successful year followed by an unsuccessful year, may want to speak with the IRS about a repayment program. A repayment program allows debtors to pay back their taxes over a period of time. To apply for an IRS payment program you will be required to contact the IRS and submit documentation that explains your economic situation. Tax debt is some of the most difficult types of debts to discharge in a bankruptcy so if you have fallen behind on paying your taxes, you should speak with the IRS about establishing a repayment program.

Furthermore, individuals that are facing troubling economic times and know that their situation will not get better any time soon, may want to consider speaking with a bankruptcy attorney. A bankruptcy will not clear all of your tax debt, but it may help you discharge a large portion. Through a bankruptcy, you may be capable of discharging the debt incurred from income taxes. However, you will still be required to pay the Federal Insurance Contributions Act taxes, these types of taxes may never be discharged. In addition, you may be capable of creating a bankruptcy repayment program that will allow you to catch up on your taxes. If you are filing for a bankruptcy and you have incurred tax debt, you may file a Chapter 13 bankruptcy that can help reorganize your debt into a three to five-year payment program.

A bankruptcy can help you find economic stability when you are facing hard times, but it is important to keep in mind that a bankruptcy is not for everyone. To speak with a Bankruptcy Attorney about your case, you may contact our office at 424-285-5525. Upon an analysis of your situation, an attorney will be able to provide options that may help you get back on your feet.

Federal, State, and local taxes

Many of us pay our taxes without really knowing we are paying our taxes. Employers tend to withhold taxes every paycheck to ensure that your taxes are paid every month. However, if you receive a complete paycheck, meaning that no money was withheld, then you will be required to pay the federal, state, FICA and local taxes on your own. The amount that each individual pays in taxes will highly depend on the individual's annual income.

  • For instance, if John who is a California resident makes $50,000 a year, he will be required to pay 11.28 percent for federal taxes ($5639), 7.65 percent for FICA a.k.a social and medical benefits ($3,825), and 3.55 percent for state taxes ($1,777). If John did not have taxes withheld from his paycheck or he has failed to deduct the taxes himself and put them in a saving, he will be required to pay a total of $11,241 in taxes meaning that his income after taxes is $38,759. As mentioned earlier, not everyone will find that these taxes apply to their situation.
  • In another situation, Anna had a very successful year earning a grand total of $100,000. If did not have taxes withheld at the end of the month, she will be responsible for paying taxes on her own. Anna would be required to pay 18.14 percent for federal taxes ($18,139), 7.65 percent for FICA taxes ($7,650), and 6.34 percent for state taxes ($6,340). At the end of the year, Anna would be required to pay $32,128 in taxes which means her income after taxes is $67,872.

Working individuals that run a private business and who are not on a pay stub that withholds taxes will be required to pay taxes on their own. However, individuals that have their taxes withheld every month will find that their taxes are accounted for meaning that they may receive a return from their taxes. In most cases, if you have your taxes withheld and you earn under a certain amount, you will only have to worry about filing a tax return.

What type of taxes can be discharged in a bankruptcy?

Individuals that are considering a bankruptcy to find relief from their tax debt should understand that a bankruptcy does not discharge all types of tax debts. If your debts are predominantly from FICA taxation, you will not be able to discharge this type of debt. To discharge debt you will want to speak with an attorney about a Chapter 7 bankruptcy. A Chapter 7 bankruptcy can help discharge debt incurred from income taxes, but it cannot help you discharge social and medical taxes. In addition, only certain types of taxes may be discharged, taxes that you incurred last year may not be dischargeable.

To learn more about dischargeable taxes, you will want to read the following section.

Taxes and Bankruptcy

If you’ve been reading above, you know that not all taxes are dischargeable and not everyone may qualify for a discharge. Individuals that want to have a portion of their debt discharged will be required to file a Chapter 7 bankruptcy. Debtors that file a Chapter 7 bankruptcy will need to pass a means test. A debtor that earns more than the median household in California (or in their state) and have enough disposable income at the end of the month, will find that they cannot pass a means test. Debtors that cannot pass a means test will not be able to file a Chapter 7 bankruptcy. Debtors that do not qualify for a Chapter 7 may want to consider a Chapter 13 bankruptcy. A Chapter 13 is not like a Chapter 7 discharge, but it provides many of the same protections allowing the debtor to establish a repayment program. Chapter 13 provides automatic stay protections so if you cannot qualify for a Chapter 7, you have other options to obtain bankruptcy protection.

Debtors that are considering a Chapter 7 bankruptcy and who are capable of passing the means test will find that a big portion of their debt is dischargeable. In addition, the debtor may be able to keep more property at the end of a Chapter 7 bankruptcy than one may think. Debtors consider a Chapter 7 when they have large consumer debts, medical bills, or tax debts that may never be paid off. When discharging tax debt the court will take into account the type of tax, the date that tax was owed, when you filed your taxes and other information pertaining to your financial history. Discharging taxes may not always be possible, but if you are interested in a discharge your best bet is to speak with an attorney. It is important to keep in mind that in certain courts if you fail to file your taxes, you will never be able to discharge your debt. To receive an honest opinion about your case, you are encouraged to speak with a local attorney.

Taxes that can be discharged assuming that they were filed on time are the following:

  • Income tax debt that is three years old. The Bankruptcy Code provides that tax debts must be at least three years old from the date that the taxes were filed. For instance, if you wish to discharged tax debt for 2017, assuming that you filed your taxes on April 15, 2018, you will need to wait till April 15, 2021, to discharge your income tax debt.
  • In addition, you must have filed your income tax return two years prior to the bankruptcy. For instance, if your taxes are due on April 2016 and you don’t file until January 2017, you may not file until two years after the date you filed your tax return. In this case, the debtor would have to wait till April 15, 2019 (2 years after January 2017 and 3 years after April 2016). Keep in mind that if you fail to file your taxes when they are due and you fail to apply for an extension, the tax debts incurred may never be discharged.
  • Your taxes must have been assessed by the Internal Revenue Service (IRS) at least 240 days before filing a bankruptcy.

Debtors that want to have their debt discharged should understand that these types of debts are different from consumer debts. In many cases, individuals with primarily consumer debts and no property will be able to proceed with a Chapter 7 without the assistance of an attorney. However, if the debtor has accumulated tax debts they are encouraged to work with an attorney. Discharging tax debts is a different procedure and in some cases tax debts may never be discharged. An attorney can help debtors understand how their situation applies to the law. Furthermore, if you are unable to file a Chapter 7 you may want to speak with an attorney about a Chapter 13. A Chapter 13 reorganization bankruptcy allows debtors the ability to include their tax debt on their three to five-year repayment program. A repayment program works around the debtors earning potentials so if you do not qualify for a Chapter 7 you may file a Chapter 13.

When are taxes filed?

Earning individuals are required to file their 2018 taxes by Monday, April 15, 2019, or may receive an extension to file on Monday, October 15, 2019. To learn more about tax dates you may want to visit the Internal Revenue Service page.

To have a better understanding of how a bankruptcy applies to your tax debt, you will want to discuss your intentions with a bankruptcy attorney. The Bankruptcy Attorney can provide further explanation on how to discharge tax debt. To reach our office, you may contact us at 424-285-5525.