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jgordosea
jgordosea, Enrolled Agent
Category: Tax
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Experience:  I've prepared all types of taxes since 1987.
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I am doing a bankruptcy estate tax return, which is all new

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I am doing a bankruptcy estate tax return, which is all new to me. This is for someone who is in chapter 11. I have figured out that I attach a 1040 to the 1041. I use the 1040 to compute the taxes as MFS. And I am reading that I get to take one exemption. But what happens to things like the child tax credit, child care credit, making work pay credit, and the dependency exemptions. Can I claim his kids and all these credits?
Submitted: 2 years ago.
Category: Tax
Expert:  Lev replied 2 years ago.

LEV :

Hi and welcome to Just Answer!
I assume that you are filing a final tax return of the decedent on the form 1040 using MFS status.
While some tax benefits are not allowed when MFS status is used - these you mentioned are allowed - child tax credit, making work pay credit, and the dependency exemptions.
The child care credit may not be used.
Let me know if you need any help.

Customer:

No, this is not for a decedent. This is for a chapter 11 bankruptcy. Are you at all familiar with bankruptcy tax filings?

LEV :

If you are filing for the estate - there are no dependents for the estate and all these credits are not allowed.
No making work pay credit because the estate doesn’t work and do not have earned income.

Customer:

Ok. I also have to file a short year return for the individual for the time period before the bankruptcy. So I guess I can take these credits on that return, right? Then I suppose I can also claim an exemption for the individual there? That would be two exemptions, on for the short year return, and one for the bankruptcy estate return. Is that right?

LEV :

If you are filing a final tax return for the decedent - as I mentioned above - that is correct. This return should include all income up to the date of death.

Customer:

I do not think you understand. There is no decedent. No one died. Are you at all familiar with bankruptcy tax filings?

LEV :

You mentioned "estate tax return" - if no one died - where the estate came from?

Customer:

I think I need to talk to someone else. Can I get the question sent back out for another expert?

LEV :

I will opt out. Your question will be open for other experts.

Expert:  jgordosea replied 2 years ago.

Greetings,

 

The trustee managing the bankruptcy is responsible for preparing and filing the income tax return for the bankruptcy estate. The bankruptcy estate has all of the assets, income and expenses in the chapter 7 administration from the date of bankruptcy being filed to the end of the year. Most all of the individual rules for credits, etc. apply to the estate 1041 return and the 1040 attached to that return; but it is the estate (not the individual) for which this return is prepared so there is only the one exemption, no children, etc of the estate entity .

 

Examples are available in Publication 908 at http://www.irs.gov/publications/p908/ar02.html#en_US_publink1000137370

Please note that the return shown is for 2008 when the date of filing was 12/2007.

That is basically a case where the full year all of the income and expenses were all in the bankruptcy estate.

 

The individual filing for Chapter 7 bankruptcy must file their own return for the year on income that does not belong to the estate. Items reported by the bankruptcy estate are not included on the individual return. All other items are reported as usual.

http://www.irs.gov/publications/p908/ar02.html#en_US_publink1000137324

 

There is an election possible by the debtor to divide the debtor's tax year into two short tax years at the date of bankruptcy being filed. If the debtor does not make an election to end the tax year, the commencement of the bankruptcy case does not affect the debtor's tax year.

http://www.irs.gov/publications/p908/ar02.html#en_US_publink1000137311

 

Please ask if you need more information or clarification.

Thank you.

 

 

 

 

Customer: replied 2 years ago.
Thanks. It sounds like you have some experience with these returns. Way more than the last expert who didn't have a clue and thought a bankruptcy estate return was for someone who died.

OK, no children can be claimed on the bankruptcy estate tax return (which is a 1041 with a 1040 attached). Got it. So that would mean no child care credit and no child tax credit either, right? Also I guess no education credit, since that is related to the dependent that I can't claim?

So it seems like I can and should take all of those on the individual 1040, right? I understand the individual 1040 is still required to cover the income and deductions for the part of the year before the bankruptcy estate was created. Also, we missed the chance for a short year return, so it will be filed for the whole year, even though we will be reporting only 5 months of activity since the bankruptcy date is 6/1/10. I am OK on this unless you tell me different.

How about the Making Work Pay Credit? Do I get a choice with that? None of the examples address such a credit. Should I claim that on the bankruptcy estate 1041/1040. Or on the individual 1040? And ideas?

Also, since I get 1 personal exemption on the bankruptcy estate 1041/1040 does that effect my ability to get 1 personal exemption on the personal 1040? Taking one exemption on each return seems like double-dipping, but it also would seem weird not to take it on the individual 1040. Is it appropriate to claim it on both returns?

I hope that is not too many question. Thanks so much for your expertise. I am truly grateful for some clarification from someone with experience with this.
Expert:  jgordosea replied 2 years ago.

Hello again,

 

Yes, you have it right.

Although it is a bit strange, it is as if the bankruptcy is another person so there is indeed allowed an exemption for each person - the individual and the estate.

 

The individual return will be for the whole year if you do not elect to split into two short years. The bankruptcy return will be a short year from the date of filing until the end of the year in the first year of the bankruptcy estate.

 

Which return claims what depends mainly on which person received the income or paid the expenses. For example, if a mortgage is paid from the bankruptcy estate (once created) that portion would not be able to be claimed on the individual return.

 

The individual 1040 is required to cover the income and deductions for the part of the year before the bankruptcy estate was created and for the rest of the year any income or deductions not passing through the bankruptcy estate.

 

My view on the making work pay credit is that it would only be on the individual return since that is the person that actually performed work; but it is not something that existed when I was actively in practice and I did not look to the statute to confirm that the specific language is only for individuals (but that is my recollection).

 

I hope this helps to clarify for you. Please continue to ask if you need more information. We can continue as long as you need and you can choose to accept as many, or as few, of my answers as you wish (or add bonus as you see fit).

 

Thank you for the opportunity to be of service. .

 

 

 

 

jgordosea, Enrolled Agent
Category: Tax
Satisfied Customers: 3003
Experience: I've prepared all types of taxes since 1987.
jgordosea and 10 other Tax Specialists are ready to help you
Customer: replied 2 years ago.
Your answers make sense and I think I am on the right track now. Thanks!!!!!

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