Tax Changes & Projected Expenses

tax changes ahead

 

At the risk of borrowing trouble, I’m looking ahead to changes to the tax laws that may adversely impact pending Chapter 13 cases.

The 2017 Tax Cuts and Jobs Act ( probably as appropriately named as the Bankruptcy Abuse and Consumer Protection Act)  limits the deductibility of state and local taxes, including property taxes.  A married couple can deduct only $10,000 of those non-federal taxes in 2018.

And unlike the limitation on the deductibility of mortgage interest, which grandfathers interest paid on loans made before 2018, there’s no safe harbor on the limitation on state and local taxes.

And our clients may not see the impact of this coming.  The withholding tables have been adjusted for the impact of the new law, but employers have no way to estimate the changes in employee deductions.

And the self employed are probably even less clued-in to the possible increase in their 2018 income taxes.

If you practice in a state with high state and local taxes, evaluating the impact of the change in tax law early may prevent a crisis come next April when debtors face an unanticipated tax bill.

Consider folding the 2018 taxes into the projected expenses if you’re doing the means test.  In confirmed cases, consider early modification and a change to the debtor’s withholding early on.

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