Many clients come to us under the mistaken belief that taxes may not be discharged in a Chapter 7 Bankruptcy. Though some taxes may never be discharged under Chapter 7 Bankruptcy (such as those withheld by an employer, or tax debt secured by property) income taxes may very well be discharged if three conditions are met.
Read MoreIf you have filed bankruptcy, you will not include the discharged debt in your gross income. The section further explains that if you have not filed bankruptcy, you may still exclude this amount from income if you were insolvent at the time the case was filed. This simply means that if your liabilities exceed your assets, you will not have to recognize any forgiven debt as income. You would be surprised at how many tax preparers do not know this.
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