How do I Treat Income Taxes On the Means Test?

If you file a bankruptcy petition and you are an above-the-median debtor, you have to complete the “means test”.  One of the allowable expenses to be subtracted from the average of your previous six months of gross income is your income tax liability.  This is found on Line 25 of Official Form 22A and line 30 on Official Form 22C.

The question is, how do you determine what number to put onto line 25 (or 30)?  Many debtor attorneys will simply calculate the total amount of taxes withheld out of each paycheck during the six month period, and divide by 6 for the average amount of taxes withheld each month.  This method, however, has been challenged by some Chapter 13 Trustees.

The problem arises when you over-deduct taxes from your paycheck.  Many people will take out more than they need for taxes in order to get a large refund each year, which is essentially giving the government an interest free loan.  Some Trustees are objecting, because the over-deduction acts as a savings plan, which should not be deducted as an expense.  These Trustees argue that it is the actual tax liability that should be deducted, not the amount withheld from the paycheck. 

Most (not all) bankruptcy courts agree with the Trustee’s who are objecting.  Of course the reverse should also be true.  If you tend to owe each year when you file your tax return, you should put on line 25 (or 30) not only the average amount of taxes deducted from your paycheck, but also 1/12 of the amount you usually must pay with your tax return.