Increasing tax withholding to decrease disposable income?

[SamanthaJones]

Have any viewers thought of this tactic, or done it, and was anything said during the BK process?

[bige1030]

You're really not going to be decreasing your disposable income in the end because it'll come back to you as a tax refund - and you've seen how many people have had to worry about forfeiting their tax refunds to the trustee.

[BKTango]

1030 is correct, and I seem to recall, maybe someone who remembers exactly can chime in here, but there was a poster awhile back who actually ran itno this type of situation. I believe if I remember correctly the trustee did notice it and questioned them about lowering it and therefore having enough money to fund a ch13.

[SamanthaJones]

I'd gladly give up a tax refund rather than fund a CH13.

But the tax thing seems tricky.
How about my other question- where do 401K contributions go, are they allowed, and is so- is an IRA contribution allowed as an expense, and if so- what amount? thanks!

[BKTango]

We didn't have 401k so I can't answer that one, I do know it would be best for you to check and double check your states exemptions if you are using state, because some states allow them and some don't. I wish I could answer that for you sorry.

[gak555]

I know they can take your tax refund if you receive it after you file so time you BK filing so you get the tax refund before declaring.

Also, there has been a lot of discussion here about whether or not a tax refund is considered income. There was no consensus - half the answers were yes and half were no.....seems to me that you already counted it as income for the tax year. You are just getting back money that you already declared as income.

I hope someone here has a definitive answer, as it can make a huge difference on the means test.

[SinkingFast]

At our 341, the Trustee said he wanted to see our 2006 Returns. He was possibly interested in our Refund, if any. We increased our Exemptions to decrease taxes withheld AFTER our 341.

Worked out for us. We had more money in paychecks thru the end of the year and the Trustee abandon our paltry refund.

As for claiming something like Zero to lower your take home pay, the number of exemptions usually shows on your pay stubs. And as BKTango said, someone did post a while back they tried that tactic and the Trustee caught it.

I answered your 401K question in your other thread. 401K goes on Schedule I. HOA fees, dunno for sure, but I did give you a suggestion.

[lrprn]

...there has been a lot of discussion here about whether or not a tax refund is considered income. ... I hope someone here has a definitive answer, as it can make a huge difference on the means test.

We asked our lawyer - he said your tax refund is NOT income because it's just money you are getting back that you already earned as a part of your gross taxable income.

The reason Ch 13 trustees often give for taking part or all of your tax return for the year you file is because the return contains money you earned after you filed which is considered a part of the Ch 13 bankruptcy estate. Our ch 13 trustee takes whatever % that is....in other words, if we filed in February last year, our trustee would take 11/12ths of our return. However if we filed in November, the trustee would take 2/12ths of our return.

I imagine Ch 7 trustees use some of the same reasoning, but when they do take tax returns, they seem to a higher % or all of the return because there's no bankruptcy estate created on filing day like there is in a Ch 13.

[bige1030]

Actually, the bankruptcy estate exists in all chapters, and it contains all property that cannot be exempted as of the date of filing (as well as inheritances, life insurance proceeds, and divorce settlements made to the debtor within 180 days of filing). If a tax refund is part of that, the Chapter 7 trustee will take it. Normally, a Chapter 7 trustee can't take the post-petition portion of a tax refund, since it's not part of the estate. (It may happen, though, but I'm not familiar with the legal reasoning behind that, though.)

One way that a debtor in a Chapter 7 (or 11) asset case can ensure that they get to keep their post-petition refund is to elect to end their tax year early. In the IRS Bankruptcy Tax Guide (Pub. 908), there are details on how to do this. The debtor making this election has two tax years during the calendar (or fiscal) year that the bankruptcy was filed: one from the beginning through the day before filing, and the other beginning on the date of filing until the end of the year. That way, the trustee can take the refund from the first short tax year and not the second.

Another benefit is that if you owe taxes, you can have them paid out of the bankruptcy estate for the first short tax year. If you don't make the election, you can't have any taxes paid out of the bankruptcy estate.

Additionally, in Chapter 13, the estate consists of post-petition earnings. The Chapter 13 trustee is interested in taking post-petition tax refunds because they consist of disposable income that is supposed to be paid to unsecured creditors through the plan. He might not take pre-petition tax refunds - but he might count them in his "liquidation analysis," though, to see if creditors do better in the plan than they do in Chapter 7.

[CATCHMEIFYOUCAN]

Increasing tax withholding to decrease disposable income?
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Have any viewers thought of this tactic, or done it, and was anything said during the BK process?

Just an FYI:

State of Virginia here, I had ZERO deduction and an additional $100 towards Federal and ZERO deduction and and additional $50 out of my taxes from both jobs, plus my $600 deduction from both jobs on my 401k, Trustee didn't blink an eye. AND I friggin' still owed about $2-3000 in taxes for the past several filing years (paid off of course). Maybe thats why he never blinked an eye!

CMIYC

[SamanthaJones]

All good insight-

The prospect of a CH13 chills me, and makes me nauseated, after all I have heard from so many sources. I was formerly convinced that passing the means test was all there was to avoiding a 13- now I am even more convinced that the means test means nothing- if your schedules show extra income, you can bet on a 13. Interesting as heck though are the myriad ways to alter and influence and loophole and deduct and re-ararnge this that and the other to figure out how to make it all work best for you? Anybody simply must gather his own knowledge before heading to pay a lawyer, there is no way anyone will get this kind of information base from a lawyer, for any amount of money. I'm also convinced that there will be shortly upcoming new clarifications for BK, tighter access to mortgages and credit cards, and that this economy is headed for trouble- so like always, the more information one can access the BETTER. Kudos~