Arizona Bankruptcy Tax Refund Exemption: Can You Keep Your Refund?

Important Update: Arizona law has changed since this article was first published. Arizona now protects qualifying portions of tax refunds tied to the Earned Income Tax Credit and Child Tax Credit. The information below has been updated to reflect current law.

For many people, a tax refund is not extra money. It may be needed to pay rent, repair a car, catch up on bills, buy clothing, or create a small emergency fund.

If you are thinking about filing bankruptcy, you may ask: Will I lose my tax refund in an Arizona bankruptcy?

The answer depends on where the refund came from, when you file bankruptcy, and which bankruptcy exemptions apply to you.

Arizona law now gives important protection to some tax refunds.

Arizona Bankruptcy Tax Refund Exemption

Arizona law protects the part of a federal or state tax refund that comes from:

• The Earned Income Tax Credit, also called the EITC; and
• The Child Tax Credit.

The law is found in Arizona Revised Statutes § 33-1126(A)(11).

The protected amount is the lesser of:

1. Your total federal and state tax refunds; or
2. The total Earned Income Tax Credit and Child Tax Credit shown on your tax return.

In simple terms, Arizona law may protect your full refund when it is no more than the amount of your EITC and Child Tax Credit.

But not every Arizona tax refund is protected.

What Part of My Tax Refund Could Be at Risk in Chapter 7?

A tax refund can come from several sources. For example:

• • Too much tax withheld from your paycheck;
  • Estimated tax payments;
  • Earned Income Tax Credits;
  • Child Tax Credits; and</li>
  • Other refundable tax credits.

 

Arizona’s tax refund exemption protects the qualifying EITC and Child Tax Credit amount. But not refund money caused by excess withholding, estimated tax payments, or other credits that are not specifically exempt under Arizona law.

Other bankruptcy exemptions may apply in some cases. Every person’s situation is different.

Example: Is My Tax Refund Protected?

Assume a family expects a $5,000 combined federal and Arizona tax refund.

Their tax return shows:

• $3,500 from the Earned Income Tax Credit and Child Tax Credit; and
• $1,500 from too much tax being withheld from paychecks.

Arizona law may protect the $3,500 that came from the qualifying tax credits.

The trustee may claim the other $1,500 unless another exemption applies.

The key question is not only how much your refund is. The important question is: What created the refund?

Does Bankruptcy Take a Tax Refund I Have Not Received Yet?

Possibly.

A Chapter 7 trustee may treat part of your tax refund as property of the bankruptcy estate if:

• You have not filed your tax return;
• You have not received the refund; or
• The refund will be paid after your bankruptcy is filed.

A trustee may review whether part of the refund is tied to income, withholding, or tax credits from before the bankruptcy filing date.

That is why it is important to review your expected refund before filing a Chapter 7 bankruptcy in Arizona.

Can This Arizona Tax Refund Exemption Help Outside Bankruptcy?

Probably.

Arizona law states that exempt property cannot generally be taken through execution, attachment, or sale under court process. This may matter if a creditor has a judgment against you.

There are exceptions. For example, the Arizona exemption does not protect property from collection for past-due child support.

What if I Recently Moved to Arizona?

People who recently moved may not be able to use Arizona bankruptcy exemptions.

Federal bankruptcy law generally looks at where you lived during the 730 days before filing bankruptcy. If you moved during that time, another state’s exemption laws may apply.

Recent moves can complicate which state’s exemption laws apply. Recent moves can complicate which state’s exemption laws apply.

Do Not File Bankruptcy Without Reviewing Your Expected Tax Refund

Bankruptcy can stop many collection actions. But filing a Chapter 7 case without reviewing an expected refund can cause problems.

Before filing, consider these questions:

• How much refund do I expect?
• How much comes from the EITC or Child Tax Credit?
• How much comes from tax withholding or estimated payments?
• Have I already filed my tax return?
• Have I received the refund?
• Did I move to Arizona within the last two years and thus cannot use Arizona exemptions in bankruptcy?

The goal should not be to file bankruptcy as quickly as possible. The goal should be to understand your options, protect property where the law allows, and make decisions that support a real financial fresh start.

Arizona Bankruptcy Tax Refund Help

A tax refund can make a real difference to a family. Before filing bankruptcy, review your expected refund and its source with an experienced Arizona bankruptcy attorney.

Legal Authorities

• A.R.S. § 33-1126(A)(11), (D)
• 11 U.S.C. §§ 522(b), 541(a), and 1306(a)
• Federal Rule of Bankruptcy Procedure 4003
• Nichols v. Birdsell, 491 F.3d 987 (9th Cir. 2007)