The intersection of taxes and chapter current attention-grabbing points. A current chapter case demonstrated this by contemplating whether or not Earned Earnings Tax Credit score refunds (and their New Mexico state equivalents) could be exempt from collectors in a chapter continuing. The case reveals how the reply can rely on the place you reside! On this case, below New Mexico regulation, the chapter court docket held that these refunds weren’t typically exempt from collectors.
Facade of courthouse with columns.
Within the case, the debtor was entitled to tax refunds, which had been partially attributable to the Earned Earnings Tax Credit score (EITC) and a New Mexico model, the Working Households Tax Credit score. Because the court docket defined, these credit are “meant to offer financial reduction to low-income heads of family who work.”
The debtor listed the tax refunds below the state’s “wildcard” exemption, which permits a debtor to decide on what property to exempt; nonetheless, the wildcard exemption right here had a restrict of $500. The chapter trustee finally objected to the claimed exemptions to the extent they exceeded the $500 restrict.
This submit will contemplate two of the arguments made in response to the trustee’s objection. First, that the EITC tax refunds weren’t a part of the chapter property. Second, that the EITC tax refunds had been exempt. The court docket finally disagreed with each arguments.
The chapter court docket first thought-about the character of the 2 tax refunds at challenge: the federal Earned Earnings Tax Credit score and the New Mexico Working Households Tax Credit score.
The court docket defined that the “EITC is a refundable tax credit score designed to assist low-income people who work and earn an earnings.” In contrast to different tax refunds, which are sometimes attributable to tax overpayments through the 12 months, the court docket famous that “the EITC can create a refund bigger than the quantity of tax paid all year long.”
The court docket defined the genesis and objective of the EITC: “[1] to scale back the disincentive to work brought on by the imposition of Social Safety taxes on earned earnings . . . , [2] to stimulate the financial system by funneling funds to individuals prone to spend the cash instantly, and [3] to offer reduction for low-income households harm by rising meals and power costs.” (quoting Sorenson v. Sec’y of the Treasury, 475 U.S. 851, 864 (1986)). Certainly, the court docket continued, “[a]fter quite a few expansions, the EITC is regarded by many as the biggest federal anti-poverty program in america.” (quoting In re Murray, 506 B.R. 129, 134 (tenth Cir. BAP 2014), aff’d, 586 F. App’x 477 (tenth Cir. 2014)).
Notably, although, the court docket additionally defined that “[d]espite its anti-poverty objective, Congress has not enacted exemptions for EITC refunds much like the protections for Social Safety advantages below 42 U.S.C. § 407 and veterans’ advantages below 38 U.S.C. § 5301(a).”
The court docket then defined the New Mexico Working Households Tax Credit score, which the court docket dubbed New Mexico’s model of the EITC. In a nutshell, the court docket defined that “[f]or the 2021 tax 12 months, the New Mexico EITC is the same as twenty % (20%) of a person’s federal EITC.”
Subsequent, the court docket thought-about whether or not the tax refunds had been property of the chapter property.
In chapter, the graduation of the case creates the “chapter property” below 11 U.S.C. § 541. In brief, the chapter property comprises, with some exceptions, “all authorized or equitable pursuits of the debtor in property as of the graduation of the case.” 11 U.S.C. § 541(a)(1). Right here, the chapter court docket cited to tenth Circuit precedent that held that “a debtor’s EITC—pro-rated to the date of submitting of the chapter petition—is property of the property.”
Primarily based on this, the court docket concluded that the federal and state tax refunds had been property of the chapter property.
The court docket subsequent turned to the New Mexico exemptions. In chapter, the debtor is allowed to “exempt” sure property, which implies the property is just not topic to (i.e., is exempt) from the claims of collectors. The exemptions are primarily based on state regulation and thus differ from state to state. Right here, subsequently, the court docket thought-about the relevant New Mexico exemptions.
On this case, the debtor was utilizing the state “wildcard” exemption, however as famous above, that had a $500 restrict, which the tax refunds exceeded (and the trustee was objecting to the quantity claimed in extra).
The court docket defined that some states have expressly handed statutes that exempt EITC refunds from collectors. For instance, Colorado regulation exempts “[t]he full quantity of any federal or state earnings tax refund attributed to an earned earnings tax credit score or any youngster tax credit score, whether or not as a refundable tax credit score or as a nonrefundable discount in tax” (Colo. Rev. Stat. § 13-54-102(1)(o)), and Nebraska regulation gives “[i]n chapter and within the assortment of a cash judgment, the complete quantity of any federal or state earned earnings tax credit score refund shall be exempt from attachment, garnishment, or different authorized or equitable course of and from all claims of collectors.” (Neb. Rev. Stat. § 25-1553.)
Right here, in distinction to these states, the court docket emphasised that “New Mexico has not executed so.”
The court docket additionally thought-about a statutory exemption for sure public help advantages. The court docket defined that some states have exemptions that apply to public help advantages. Regardless that the court docket concluded that the EITC refunds had been public help, the court docket pressured the restricted nature of New Mexico’s public help exemption. The New Mexico statute offered that “[a]ssistance granted below this act shall not be transferable or assignable, at regulation or in fairness, and not one of the cash paid or payable below this act shall be topic to execution, levy, attachment, garnishment or different authorized course of, or to the operation of any chapter or insolvency regulation.” (N.M. Stat. Ann. § 27-2-21.)
In deciphering this statute, although, the court docket famous that the exemption applies solely to “cash paid or payable below this act.” Thus, it didn’t exempt the federal or state EITC as a result of neither had been paid below the New Mexico Public Help Act.
Consequently, the court docket concluded that “federal EITC and New Mexico Working Households Tax Credit score, regardless of having an anti-poverty objective, are usually not exempted from the claims of collectors below the New Mexico Public Help Act or every other New Mexico exemption apart from New Mexico’s $500 wildcard exemption.”
In conclusion, this case demonstrates an intersection of tax and chapter regulation. Furthermore, it reveals how the chapter results of tax gadgets—right here, tax refunds—can differ relying on the state of the chapter.
The case is In re Medina, No. 22-10233-j7 (Bankr. D.N.M. Dec. 16, 2022).
That is solely a abstract of the case and a few parts—together with details, points, or evaluation—might have been omitted or edited; if you happen to want recommendation on this space, please evaluate the case in its entirety and seek the advice of an lawyer.