What about taxes and witholding?

[LostOne0069]

When you file bk, how do they figure out how much "net" income you have? I mean, if they just look at your pay stub, what's to stop you from setting your witholding allowances to 0 a few months prior to your bk which could cut your net take home dramatically.

I ask this as I need to lower my witholding allowances as I had it set to 9 because I had 2 mortgages that I paid interest on which gave me a substantial tax benefit. I worry about what they use to determine net takehome as my net takehome is going to go down by $300-$400 per month.

[SinkingFast]

The one attny we saw didn't even run a Means Test. He simply took Hubby's take-home pay and started deducting expenses. At the end of that, he determined we had $197/mo of income not otherwise accounted for so that would be our Ch 13 payment.

Other attnys, that have given us paperwork to complete, start with the Gross income and then take out deductions. There's allowances for Fed, State, Local income taxes paid, Soc Sec deductions, various insurances you pay your employer for that are payroll deducted, etc. Basically, they get back to the take-home pay the one attny just started with.

If you change your exemptions, that will reduce or increase your Net. If you go from claiming 9 to claiming 4 or 5, you'll see a reduction in Net because more taxes will be withheld. Hubby currently claims the max allowable for the same reasons as you. We needed every single penny of income each month.

For us, going from the max allowable to the 3 we previously had withheld could easliy wipe out the $197/mo disposable income that one attny fig'd we had. But could suddenly changing exemptions to reduce Net income cause problems for you for filing BK?? Wonder if that's an area that might be considered "fraud"???

[LostinMi]

My attorney used gross income and calculate take-home based on the IRS guideline -- not what was on my checkstub. I found this out because the numbers were different than what I had calculated and this was the reason.

[StaciMM]

Not sure what you should do, but in the end, your pay needs to be itemized in the bankruptcy petition. You'll list gross, then break down deductions, and then list net. If you have an unusually high amount of taxes withheld, don't expect it to go un-noticed.

On the other hand, if you're not having enough withheld and would expect a tax bill if you don't change it, you should be fine to adjust it-just keep it reasonable.

[JimH]

Have to remember that although you are taking taxes out every pay, the trustee knows you get some or most of that back when you file your taxes. You need to start with gross wages. Deduct the social security and medicare taxes as these are a fixed % and don't change until an individual makes over something like $75,000 / yr. Also, deduct what your actual tax obligations are for federal, state, and local taxes - these payroll deductions usually don't line up with the actual amount.