Question about taxes if you are over state income

[steve24151]

We are trying to qualify for a chapter 7 but we are over on income. My lawyer told me that we are about $1K over and suggested that we take out at least $600.00 extra in taxes along with getting a new car to increase expeses. Is this acceptable and is it done often?

[steve24151]

Sorry , I meant to say a chapter 7 not 13.

[debee]

If you end up paying $600 in taxes every year when you file your return, then adjusting your withholding to reduce your current income by that amount would be fine.

If you don't end up paying $600 in tax every year then I would find another lawyer because if you alter your withholding & then file, the bankruptcy trustee (more specifically, the United States Trustee) can object to your chapter 7 discharge citing "presumption of abuse" on the basis of overwithholding and a failed Means Test.

Many people buy a new car, or if a couple, two new cars prior to filing bankruptcy. Reliable transportation is important and each car payment reduces the monthly income by $496 (or so, I forget).

There are other ways to increase allowed expenses on the Means Test such as term life insurance (on you & your spouse), lowering insurance deductible on all policies and raising coverages.

You can look over the Means Test here. Enter your zipcode and follow the steps and see how you do.

[steve24151]

debee,
thanks for your reply. we ended up owing around $1600.00 in 2010 and 2011 will be that much if not more if we dont increase our tax withholdings. Do you thing this would pass the UST?

[debee]

Hi steve,

Sounds like your lawyer is on target then.

The way it works is you reduce your gross income by your expenses, one of which is taxes. So you can reduce your income by the taxes that you actually pay. That is an allowed expense that helps you pass the Means Test.

It would have been different (& stupid) to just change your withholding and overpay taxes and hope to sneak that past the UST. It doesn't sound like that is your case at all, so you're fine.

You can definitely reduce your income by the taxes you actually pay and also with car payments.

Welcome to the forum!

[steve24151]

Well, I think I may have jumped right back into the stupid column again. It is a per month amount of $600.00 extra in taxes. I questioned him when he told about it if it would pass with the trustee and he said it would and is an allowable expense. Said that he does it all the time...

[debee]

I wonder if there is a miscommunication between you and your attorney on the tax issue.

If you pay $7200 per year in taxes (when you include federal, state, social security, medicare, etc) then it is totally fine to claim an expense for $600 per month in taxes.

You just don't want to claim a tax expense that you don't actually pay. The trustee/UST need only look to your previous year's 1040 to see what you paid and if it doesn't line up, it's game over.

[daylate]

I agree with debee. Tax withholdings and tax expense are two entirely different things. Lets say you make 100k and have a tax bill of 24k. Your monthly tax expense is 2k. Now if you withhold 3k you'll get a refund of 12k. If tax withholdings were an allowable expense to make the means test work, no one should ever fail. You just jack up the w'h's till you pass.

[IamOld]

Everyone else above is very right - I would add that i had to do the same - but then I was WAY underwithheld to pay...cc bills! So for me, this is the first time in years that I'm anywhere near where I should be withholding-wise.

[steve24151]

Well, I had an e-mail conversation last week about the tax issue. He assured me that we need to increase our withholding even if we do not file. We must be way under-withheld. Im sure he is correct becasue we owed Federal last year and I'm sure we will again next year. If we did not have mortgage interest we would have owed BIG TIME. Thanks for all the advise!