Are bankruptcy fees tax deductible?

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Are bankruptcy cost and fees considered tax deductible? When looking at that kind of tax deductions that maybe available when you are in a Utah bankruptcy you first need to understand there are difference options depending on the kind of bankruptcy case you filed be it Chapter 7 or Chapter 13. When it comes to filing bankruptcy, you will have to pay fees to your attorney, the court, and in order to complete the required credit counseling course and you will need to pay a fee to take this class. The IRS views these fees as personal expenses, so they are not tax deductible. However, IRS regulations allow you to deduct legal fees and accounting expenses that relate to tax issues or income tax preparation. For example, you can deduct legal fees assessed for the time your attorney spends giving you tax advice or communicating with the IRS about any tax issues you may have. You can also deduct income tax preparation costs while you are in a bankruptcy proceeding.

Also be aware that under (non-bankruptcy) circumstances, you must report and pay income tax on any debt or part of a debt that a creditor forgives but when forgiven debts pertain to a bankruptcy, you do not have to report the forgiven amount on your individual income tax return. Sometimes you will be sent a Form 1099c form from a creditor listed in your bankruptcy. You will need to discuss with your bankruptcy lawyer or your tax preparer how you will report this on the following years tax filings. Do not just ignore listing the forgiven income because this will cause you problems down the road with the IRS.

If you’re in a Chapter 13 bankruptcy repayment plan, don’t forget to carefully examine your bankruptcy payments for tax deductions. Depending on what is being repaid by the trustee in your Chapter 13 bankruptcy, you may be entitled to deduct some payments that are being paid on your behalf to your current tax debt. For the purpose of your taxes, payments made by your Bankruptcy trustee will be treated as if you made them yourself. Speak with your bankruptcy attorney and tax accountant to find out what tax deductions may be available to you during Chapter 13 bankruptcy. So yes some bankruptcy fees tax deductible.

The Utah Bankruptcy Guy is a service of the Law Office of Douglas Barrett, LLC located in Orem Utah. We help good folks in bad situations obtain debt relief under the U.S. Bankruptcy Code. Call us today to see if bankruptcy is your best option.

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