Federal taxes and Chapt. 13

[pleiku10]

Why are the payments to the trustee not reportable on your federal taxes?? You get taxed on the money as if you had it as disposable income when in fact its going to pay back interest to the bank, although I understand that the plan is not paid out untill the end. Do you get a deduction when the money is paid out to the bank? I feel like its a double whammy-Mike

[Flamingo]

Why are the payments to the trustee not reportable on your federal taxes?? You get taxed on the money as if you had it as disposable income when in fact its going to pay back interest to the bank, although I understand that the plan is not paid out untill the end. Do you get a deduction when the money is paid out to the bank? I feel like its a double whammy-Mike

The payments to the trustee are a certain percentage fee the trustee takes for handling your Chapter 13 over a 3 to 5 year period. The trustee takes your payments into your confirmed Plan and distributes them over that period of time to your creditors. He also takes out his fee. None of your payments to the trustee, your attorney or as to your Plan or to your creditors are tax deductable.

[cynhgm]

Why should it be in any way tax deductible? The money you used to use to pay credit card bills, mortgage, car loans, etc. was not tax deductible either. The trustee payments are just controlled and mandated payments toward your debt. Nothing really changed in this regard.

[HHM]

I concur, why would the payments be tax deductible in the first place. As was mentioned, in the normal scenario, the credit card payments you were paying weren't tax deductible.

You should be thankful that the portion of the debt you are NOT paying back is not treated as taxable income.

[goon]

Interesting thought, what if there are things being paid by the trustee that you would normally be able to claim on your taxes ( for example medical bills ) ?

[momofthree]

You should still be able to claim tax deductible items, whether it be mortgage interest, medical, etc. However, keep in mind that for medical, you can only claim in excess of 7.5% of your income. So, for example, if your income is $50k per year, 7.5% of that would be $3750, so you can only deduct the amount paid that EXCEEDS $3750 each year. Depending on how the trustee is disbursing your payments, you may not hit your minimum, but definitely keep track....

[goon]

That is true for federal medical deductions, but many state tax laws vary as to what can be deducted.
I do not have any medical bills in my case, but was just curious of that situation, I have read of many people with LARGE medical bills filing for Ch 13.

So if you got audited by the IRS (or other tax authority) down the road, would showing some kind of payment record/statement from the Trustee hold up?

[Flamingo]

Most people that file Chapter 13 and who formerly itemized on that taxes usually find themselves having to take the standard deduction because of the entire situation. They just do not have enough deductions anymore after filing and when they add up their deductions, find it better to take the standard deduction. If one was able to itemize any medical bills included in their Chapter 13, they could only state the amount that was paid by the trustee for the tax year in question.

I suggest anyone filing a Chapter 13 with tax issues/questions consult with a tax professional or have their Chapter 13 attorney review the situation.