8.2 Tax Refunds and Credits

A tax refund attributable to pre-petition income is property of the bankruptcy estate.1 Generally, a trustee will pro-rate a tax refund by the days prior to the bankruptcy filing and treat the pro-rated part of a post-petition tax refund as a pre-petition asset available to satisfy pre-petition debts.2 For example, if the debtor filed his bankruptcy 73% of the way through the year, the trustee will claim 73% of the tax refund under the “pro rata by days” method. A taxpayer who is able to file earlier in a year will be able to protect more of a tax refund from the trustee and creditors.

The Child Tax Credit has both refundable and non-refundable portions. The Child Tax Credit may not accrue until the end of the tax year. Bankruptcy courts have held that the refundable portion of the Child Tax Credit is property of the estate, but that the non-refundable portion is not.3 However, one court has held that no part of the Child Tax Credit is property of the bankruptcy estate because the earliest accrual date of a Child Tax Credit is January 1 of the next year.4 In Louisiana, both the Earned Income Credit and the refundable portion of the Child Tax Credit are exempt from seizure though the exemption from seizure only applies to the taxpayer’s federal tax refund.5

Many bankruptcy courts have standing orders for debtors to turn over tax refunds to the trustee. Entitlement to the refunds can be litigated by motion should the trustee to decide to claim all or part of the refund.

• 1Kokoszka v. Belford, 417 U.S. 642 (1974); United States v. Michaels, 840 F.2d 901 (11th Cir. 1988).
• 2See, e.g., In re Meyers, 616 F.3d 626 (7th Cir. 2010).
• 3In re Law, 336 B.R. 780 (8th Cir. B.A.P. 2006); In re Matthews, 380 B.R. 602 (Bankr. M.D. Fla. 2007); In re Donnell, 357 B.R. 386 (Bankr. W.D. Tex. 2006); see also In re Zingale, 451 B.R. 412 (6th Cir. B.A.P. 2011).
• 4See In re Schwarz, 314 B.R. 433 (Bankr. D. Neb. 2004). Contra Law, 336 B.R. 780.
• 5La. R.S. 13:3881(A)(6).