Trustee Blog

Taxes Actually Incurred

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Riverside Bankruptcy Trustee Steven Speier

Taxes Actually Incurred

Trustee Speier sometimes asks the debtor to review his means test at line #25. The Form 22A (the means test) asks at line #25 for Other Necessary Expenses: Taxes.

“ Enter the total average monthly expense that you actually incur for all federal, state and local taxes, other than real estate and sales taxes, such as income taxes, self employment taxes, social security taxes and Medicare taxes. Do not include real estate or sales taxes.”

This convoluted paragraph asks the debtor for the taxes the debtor incurs, but not real estate or sales taxes. The operative word though is “actually”.

While a client may have federal taxes withheld from his paycheck and evidenced by his pay stubs and W-2 statements, this amount may be adjusted by a tax refund. So the “actually incurred” is taken to mean the amount that the debtor ends up paying after the adjustment of the tax refund.

If the adjustment is not taken, then the line #25 is inflated and there appears to be less money available for disposable income on the means test. This inflated number then allows debtors to “pass” the means test, however Trustees and the US Trustee challenge this line and ask for the amount that is actually incurred or should be incurred.

Mr. Speier will ask clients to go to the online IRS Federal Tax calculator to find out how much the client should be withholding and his position is that is the amount that should be on Line #25 of Form 22A.

Practice Pointer:

When the client is interviewed at intake, ask if she received a tax refund last year. If she did, she may be “over-withholding” on her paychecks in order to qualify for such a big refund. Please take this “over-withholding” into account when filling out the means test.

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