Getting the Most from the Means Test

When the means test look back period for a well paid individual includes the end of the year, a bankruptcy lawyer cannot rely on the paystubs to define the tax deductions.

That’s because contributions to Social Security and other some other taxes  are capped at certain income levels.  Wages above the cap are not subject to the tax.

So the later in the year the pay stub, the greater the chance that the Social Security deduction has dropped off.

The fundamental means test proposition is that income is retrospective, expenses are prospective.

So, the expense side of  Form  122A-2 is forward looking.  It calls for the taxes your client will incur monthly in the future.

Let’s suppose your client is highly paid and  filing in February.  The look back period is August through January.

The pay advices for the last months in the previous year may show little or no Social Security tax in the late year pay stubs.

But you have the last paystub of the year, with the year to date deduction amounts.

Take that year end paystub , and divide the annual tax by 12.

Voila, you had the monthly average Social Security contribution for the debtor, going forward.

Image courtesy Ezola