In 2011, the Ohio legislature amended the exemption statute that protects certain types of property in bankruptcy (a discussion about exemptions may be found elsewhere on this website). The amendment was long past due, because the exemptions had not changed significantly in more than thirty years. The 2011 amendment increased the value of property that individuals may keep when they file for bankruptcy relief. Among many changes, the exemption statute now protects earned income credit and child tax credit. In both Chapter 7 and Chapter 13 bankruptcy, this means an individual may retain a large income tax refund that results from earned income credit and child tax credit. The child tax credit typically entitles parents to $1,000.00 for each child under the age of seventeen. Before the amendment, many individuals who filed for bankruptcy relief were forced to pay their income tax refunds to the Trustee for distribution to creditors. In most cases involving a large income tax refund, the majority of the refund is the result of earned income and child tax credits.
Before a taxpayer receives a refund that includes a child tax credit, however, any income taxes that were not withheld from wages must be paid in the form of a setoff. For example, if a married couple has two children under the age of seventeen, and therefore is entitled to a child tax credit of $2,000.00, a portion must first be applied to the tax still owed. So, if the couple owes a $1,000.00 income tax liability, the couple will only receive a refund of $1,000.00 from the child tax credit, plus any amount withheld from wages. Until recently, however, the couple could claim the full $2,000.00 child tax credit as exempt. So, if the couple received a total refund of $2,000.00 because sufficient taxes were withheld from their wages, the couple could keep the entire refund after filing for bankruptcy relief. The Sixth Circuit Court of Appeals is currently considering the case of In re Zingale, in which the Sixth Circuit Bankruptcy Appellate Panel decided that only the child tax credit actually received may be exempted (and not the portion set off against the tax liability). Therefore, more bankruptcy debtors are currently losing a portion or all of their income tax refunds. Stay tuned, because this case could require waiting to file or losing a significant income tax refund. Be sure to consult with your bankruptcy attorney before you file your income tax returns!