We talked earlier about correcting projected taxes for means test purposes when the situation is stable and the debtor is either under or over-withheld.
When there are more moving parts, for tax purposes, you’ve got different adjustments to make.
Loss of deductions
The most frequent change is that the debtor has either had property foreclosed or will be surrendering property following the filing.
The mortgage interest deduction is gone, as is the property tax deduction. If the property is rental property, depreciation deductions are also lost.
A reader comment to the earlier treatment of this subject suggested that the bankruptcy lawyer just resort to figuring projected taxes via PaycheckCity.com.
That doesn’t do it for me if the client itemizes deductions. The site just has no ability to deal with that level of complexity.
But where the changes you’re dealing with are the loss of deductions or change of family composition and perhaps the client will take the standard deduction, PaycheckCity makes lots of sense.
Employed or self employed
Another change you might have to deal with involve a debtor going from employment to self employment. Don’t forget to estimate the self employment tax.
Some of our clients even get better jobs or anticipate a spouse returning to work.
Don’t overlook any tax impact of a prepetition foreclosure or short sale that generates cancellation of debt income.
Though not a Line 25 issue, if you’re struggling to get below the presumption, and the debtor is underwithheld for the current year, consider electing a short tax year to make the prepetition portion of the tax year a priority claim in the bankruptcy.
Whether or not there will be assets in the estate to pay the tax, you will have created a prepetition priority claim for deduction on Line 44.
Call in help
If the means test outcome is critical and the situation complex, send the debtor to competent tax professionals for an estimate of projected taxes.
The revamped Bankruptcy in Brief website, a comprehensive store of bankruptcy explanation for non-lawyers, is now open. Tell me what you think.
Image courtesy of Flickr and 401(k)2013.