In recent years, some credit card companies have urged people to pay their taxes with a credit card. Don’t be tricked into thinking that credit card companies are sympathetic and acting on your behalf; this tactic is used to protect their own backs in the event that you have to file for bankruptcy. This is because when you pay taxes with your credit card, that particular credit card debt (the amount you paid off taxes with) is non-dischargeable if the credit card holder files bankruptcy. Meaning the credit card holder may not have to pay off the other credit card debt if he/she files bankruptcy, but as far as the taxes paid via credit card, the card holder is still responsible for paying that off. Congress even expanded this protection of credit card companies to include state and local taxes that are paid with credit card as well.

In Florida, property taxes are paid at the end of the year and federal income taxes for the previous year are due on April 15th. In this 4 to 6 month time frame, people are hit hard with property and income taxes, and it can be difficult to pay back the full amount with savings – so credit cards seem like a great option. But with credit card companies protected, if you are behind on your savings and use a credit card to pay your state or local taxes, then that debt may be non-dischargeable if you file for bankruptcy protection.

Many questions arise with this legislation. If someone were to take a cash advance on a credit card, and then pay their taxes with cash, would that debt be non-dischargeable? If you pay your state taxes on a credit card and then continue making payments without acquiring new debt, what part is non-dischargeable? The questions can continue, but the ultimate lesson is this: If credit card companies offer a convenient and helpful hand to their costumers, I recommend taking a second look before thinking it is too good to be true. In the case with taxes and credit cards, you may find yourself with extra debt if you are to file for bankruptcy at some point in the future.

Bottom line: It is probably not a wise idea to pay your property or income taxes with credit card. And if you think you might have to file bankruptcy, know what debt is and what debt is not dischargeable when you file.

Fortunately, if you file for bankruptcy and have these questions or issues, you talk to an experienced bankruptcy attorney at Clark and Washington. The bankruptcy court can settle disputes between all debtors and creditors, even if the creditor is the IRS.

Recently one of our clients expressed surprise that our attorney was asking about income tax debt, stating "I did not think that I could even include this tax debt in my bankruptcy."

In fact, you are required by the Bankruptcy Code to include income tax debt in your Chapter 7 or Chapter 13 case, and in some cases, this tax debt can be reduced or eliminated in bankruptcy.

The question of whether your income tax can be discharged in bankruptcy depends on how old the debt is and when you filed your return.  In order to be dischargeable, your tax debt must meet the following conditions:

1. The due date for filing your tax return is at least three years ago.
2. Your tax return was filed at least two years ago.
3. The tax assessment is at least 240 days old.
4. Your tax return was not fraudulent.
5. You are not guilty of tax evasion.

Here is an example:  you filed your 2005 tax return showing $7,500 in outstanding debt on April 7, 2006.   On April 16, 2009, that $7,500 became dischargeable, meaning that it could be eliminated in a Chapter 7 filing and treated as unsecured debt in Chapter 13.

If, however, you did not file your 2005 return on time, waiting until November, 2009 to do so, your tax debt would not be dischargeable as of today (January 16, 2010) because less than two years have passed since you filed your return.

Substitute returns filed on your behalf by the IRS do not count as filings for purposes of dischargeability. Similarly, tax debt that is secured by a tax lien may be dischargeable but the lien may still be valid.  And finally, only income taxes can be discharged in bankruptcy – trust fund (941) taxes cannot be discharged.

Not surprisingly, the rules about discharging tax debt in Chapter 7 or Chapter 13 can be confusing and you are welcome to call or email our office for advice unique to your situation.