Don’t miss the tax deductions hiding in your Chapter 13 plan payments.

It may be that you feel overwhelmed in filing your income tax return while under a Chapter 13 bankruptcy repayment plan because you're not making payments directly to creditors.  That is to say,  unlike normal procedure, a Chapter 13 Trustee may be writing checks to the bank for your mortgage,  those things that you used to do and then deduct on your taxes.  As a result, you may difficulty and  hesitate to claim those deductions come tax time.  This is an error: whether you pay the debt directly or the Chapter 13 Trustee pays it on your behalf  does not change the tax treatment of the payment, just the payee. The bankruptcy trustee is required to make those payments on your behalf to your respective creditors. So, for the purposes of federal income taxes, it's as though you've made the payments yourself.

Deductions

Some of  the common deductions that appear in the Chapter 13 payment records are mortgage interest, property taxes, and business expenses.

• Mortgage interest:   If you are using your Chapter 13 Plan as a way to get caught up on your mortgage payments, those past due payments may contain deductible interest if you itemize deductions!  The only problem is that banks usually do not file 1099s with the IRS on mortgage interest paid through a plan.

•  Taxes:   Property taxes paid through the plan should be deductible.  Likewise, state income taxes paid by the trustee are deductible.

•  Business expenses:   If you operate a business in Chapter 13 or operated one before you filed, you may be paying business leases, sales taxes, or vendor debt through the plan.

Where is the information needed to calculate these numbers?

The information on  payments made by the Trustee that may be deductible can be ascertained from the Trustee’s disbursement report.  I have not seen lenders sending 1098′s reporting mortgage interest paid to debtors as to the mortgage arrears when the arrearage checks come from the trustee.  Luckily, the information on payments is readily accessible because, most if not all Chapter 13 trustees are on the web, and usually debtors can access the payment reports by creditors and date.

However, since the lender does not seem to calculate the interest component from the Chapter 13 payments, you must calculate it yourself from the proof of claim and the Trustee report to back up your claim for a tax deduction.  Save the printout of the trustee’s report in case of question by the taxing authority and show how you calculated the deductible expense.  An HP 12C calculator is useful for the calculations.  The IRS will not have gotten a matching report from the lender who got the money and hasn’t reported it to you and the IRS.

Business Expenses

If you are self employed, on a cash accounting basis, and are paying back business debts in your plan, be sure to include these as well.  To assist in the calculation, make sure you identify the business debts upfront in the schedules.   If you are not paying back 100% of your debt, you will not get 100% of the deduction you would have received if you had not filed bankruptcy, but it can certainly make a difference.  Again, you need to document everything yourself, so get the proofs of claim along with the trustee’s disbursement records.  Note that most unsecured debt is paid near the end of the plan life.

In a bankruptcy?  Maybe you need to amend your returns?

If your plan is paying deductible expenses and you’ve been in the bankruptcy case for several years, you may want to look at prior year trustee reports.  Overlooked deductions might justify going back to amend a prior return.  Tax returns are generally amendable for three years.

Get Trusted, Experienced Bankruptcy Counsel Today

Applying decades of experience, Steven Taylor will assess your financial situation and hear you out on your goals. The vast majority of the costs of the bankruptcy can be paid as part of your Chapter 13 plan, over time, making Chapter 13 an affordable solution as well as a life-changing one for many people with debt problems. To discuss your immediate concerns and long-term financial challenges, request a free telephone consultation with Steven Taylor today.  He can help you find the best solution and take decisive action to regain your financial foothold.

Steven P. Taylor, P.C. | Indianapolis Chapter 13 Bankruptcy Lawyer

Contact the law firm of Steven P. Taylor, P.C. today at (317) 271-1111 for a consultation about whether you should file for Chapter 13 bankruptcy in Indiana or email us your questions.  

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Steven P. Taylor, P.C. | Indianapolis Chapter 13 Bankruptcy Lawyer

Contact the law firm of Steven P. Taylor, P.C. today at (317) 271-1111 for a consultation about whether you should file for Chapter 13 bankruptcy in Indiana or email us your questions.  Steven P. Taylor will assist you in determining whether a Chapter 13 bankruptcy is the best path for you, and will guide you through the bankruptcy process.