Deduction Question

[iupui1299]

Does it matter what I claim on my paycheck if I am filing bankruptcy. I have a family of 4 and I claim 4 for federal and o for state...do I need to change this?

[SinkingFast]

The Trustee will get it one way or the other if you're in a Ch 13 plan. If you file Ch 7, the Trustee may go for a portion of your income tax refund next year. It's prorated according to when you file in the year. So it really doesn't make much of a difference.

Some people will reduce their withholding deductions/exemptions to reduce their net pay to help with the income to expenses Schedules. The Court is wise to that one. So Trustees take a portion of the income tax refund that comes the next year.

[FoolAndHisMoney]

This does bring up an interesting point. Even if someone lowers their deductions to increase witholding which will decrease net income this may allow someone to pass the means test. Obviously you will have a bigger tax refund the next year which will go to the trustee, but it's better then a chapter 13. I guess like every other expense they will keep a close eye on this one for the 6 months prior. The chapter 7 trustee will be pleased with this, but the US Trustee and court probably won't like it.

[no_it_all]

This does bring up an interesting point. Even if someone lowers their deductions to increase witholding which will decrease net income this may allow someone to pass the means test.

Yes, any allowable expense that comes off gross income will help with the Means Test Calculation

Obviously you will have a bigger tax refund the next year which will go to the trustee, but it's better then a chapter 13.

Not obvious at all..to wit: Jack has a 1,700 per month mortgage payment. He is in the 20 percent tax bracket due to this juicy tax deductible payment. In his bk he plans to give up the house and maybe some other tax deductions..This effectively raises his tax liability (due to loss of deductions) and to compensate, he lowers his deductions at work. Result is less net income and no tax refund at the end of the year (since his liability has increased).....If Jack's post-bk tax liability was estimated to be the same as his pre-bk tax liability then any attempts to lower his net income by manipulating his witholding tax may be closely reviewed...

[SinkingFast]

Yes, any allowable expense that comes off gross income will help with the Means Test Calculation



Not obvious at all..to wit: Jack has a 1,700 per month mortgage payment. He is in the 20 percent tax bracket due to this juicy tax deductible payment. In his bk he plans to give up the house and maybe some other tax deductions..This effectively raises his tax liability (due to loss of deductions) and to compensate, he lowers his deductions at work. Result is less net income and no tax refund at the end of the year (since his liability has increased).....If Jack's post-bk tax liability was estimated to be the same as his pre-bk tax liability then any attempts to lower his net income by manipulating his witholding tax may be closely reviewed...

We had actually thought of the impact of giving up the house in the BK on our tax refund situation. No taxes and interest to deduct. But didn't wanna mess with the pay stubs pre BK. Maybe after we file, we can take care of that. But we felt any adjustment while we were in the deciding and waiting to file period might draw close scrutiny.

[iupui1299]

We are going to file chapter 7. I just wanted to know if they would require me to change my deduction so that my paycheck was bigger...but now that I think about it that was a dumb question because since I claim 4 then my paycheck is as big as it can get anyway. If I claimed 0 ,1,2 it would be smaller in income.