Like the title says, from the filing process and tax questions to tax policy and reform, you can search and share All Things Tax here. This is the place to find answers to all your general questions that don't fall under the other categories. And just a reminder: questions about software or online filing should be posted in DIY Products.
11-21-2017 09:06 PM
11-21-2017 10:50 PM
Filing jointly is almost always the best option, but when you're not sure the best option is to compare the two options and go with the one that yields the best outcome for you. Also, the bankruptcy issue might not even affect the outcome of your tax return at all, but we'll get to that shortly.
If you file separately then you can still claim the child tax credit, but you will lose practically all other child-related benefits. Most credits are not allowed when filing using the MFS status. There are also limits on numerous things when filing separately and your tax rate is higher. MFS can be beneficial when one or both of you earn a high income ($75,000 or more) because filing separately in that situation may drop one or both of you into a lower tax bracket which may result in less tax, but again you always want to compare the options before filing separately.
If you file jointly then all child-related benefits can be claimed if you qualify. You'll get a larger standard deduction and multiple personal exemptions on the same tax return and you'll also get a lower tax rate.
So where the bankruptcy comes into play is that if there is forgiven debt from that bankruptcy then it becomes taxable income, but it may be excludable depending on your situation. Cancelled debt from a principal residence is almost always excludable. Also, if your husband is insolvent, meaning his assets are less than his liabilities immediately before the bankruptcy, then you can exclude the forgiven debt up to the extent of the insolvency. For example, let's say your husband has $15,000 in credit card debt and $5,000 in the bank. The bank forgives $5,000 of the credit card debt. Because your husband's liabilities exceeded his assets by $10,000 immediately before the debt was forgiven he can exclude up to $10,000 from taxable income, so all $5,000 of the forgiven debt is non-taxable. Forgiven debt is figured individually even if you file jointly, so again you should definitely consider both options before filing.
If the bankruptcy and any cancelled debt occur after the first of the year then this will not affect you until you file your 2018 tax return, but if the bankruptcy happens before January 1st and any debt is forgiven before January 1st then it will affect your upcoming 2017 tax return.
If you have any other questions I'll be glad to help.
Senior Tax Advisor (Tampa, FL)