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Additional Child Tax Credit Exempt from Bankruptcy Estate.
(Parker Tax Publishing November 3, 2014)

A debtor could exempt the refundable portion of her additional child tax credits (ACTC) from her bankruptcy estate as a public assistance benefit; the bankruptcy trustee's reliance on Hardy v. Fink, 503 B.R. 722 (B.A.P. 8th Cir. 2013), which held that the ACTC did not qualify as a public assistance benefit for Missouri bankruptcy purposes was rejected. In re Hatch, 2014 PTC 529 (S.D. Iowa 2014).

Felicia Hatch is a single mother of three children ranging in age from one to 14 years old. Felicia filed a voluntary chapter 7 bankruptcy petition on December 13, 2013 and, at the time, she had the following sources of monthly income: gross wages of approximately $2,403, child support of $100, and $500 from the Supplemental Nutrition Assistance Program (SNAP). On Schedule B of her filing she identified an anticipated tax refund for 2013, including the earned income tax credit (EITC) and an additional child tax credit (ACTC). She claimed both as exempt from the bankruptcy estate on Schedule C. The bankruptcy trustee filed an objection to the exemption for the ACTC, disputing Felicia's ability to claim any ACTC amount as a public assistance benefit that qualified for exemption. There was no objection to excluding the EITC as exempt because it was a public assistance benefit.

Under Code Sec. 24, a taxpayer can claim a tax credit of $1,000 for each qualifying child during the tax year provided that the taxpayer remains below specified adjusted gross income (AGI) limitations. As various levels are reached under AGI, the tax credit begins to phase out, determined by a fraction of the amount exceeding the given threshold. Felicia claimed a $3,000 child tax credit and used $190 of it to reduce her tax obligation to zero. The remainder, $2,810, was the refundable ACTC.

In support of his objection to the exemption, the trustee cited Hardy v. Fink (In re Hardy), 503 B.R. 722 (B.A.P. 8th Cir. 2013), which held that the ACTC does not qualify as a public assistance benefit for purposes of exemption from a bankruptcy estate under Missouri law. An amicus curiae brief filed in Felicia's case argued that there was little, if any, difference between the Missouri and Iowa exemption statutes making In re Hardy dispositive of the trustee's objection to Felicia's claim of exemption for her ACTC.

The bankruptcy court rejected the trustee's objection and held that the ACTC was exempt from Felicia's bankruptcy estate. The court noted, in In re Hardy, the Bankruptcy Appellate Court stated that because it had not been shown that higher income individuals will never obtain the benefit of the ACTC under Code Sec. 24, it cannot constitute a public assistance benefit.

In response to that comment, the bankruptcy court said it is difficult to state with absolute certainty that an event will never occur, and it is equally as difficult to predict that an event will always occur. However, the court distinguished the facts in the instant case as the exhibits from Felicia's attorney showed there was little evidence to suggest that high income earners obtain any benefit from the ACTC, in contrast to the benefits obtained by lower income wage earners.

Based on the evidence, the court observed, the number of high income individuals that might possibly obtain the benefit of the ACTC in comparison to the substantial number of individuals of modest and low income levels that do benefit from the ACTC is sufficient to satisfy the public assistance standard. To conclude otherwise, the bankruptcy court said, would result in the exceptions for a few dictating the availability of the exemption to many. The court stressed that, under Iowa law, allowing an exemption for the EITC but then denying an exemption for the ACTC for the same person based only upon inapplicable AGI levels that are is inconsistent and at odds with Iowa's liberal construction of exemption statutes in favor of debtors. The anecdotal and empirical evidence in this case, the court concluded, supported the holding that the refundable portion of the child tax credit is exempt as a public assistance benefit under Iowa law. (Staff Editor Parker Tax Publishing)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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