23 Nov Means Test: Don’t Give Up, Even If You Think You’ve Flunked It, Part 3
If you’re a consumer thinking about filing bankruptcy, you probably know about the “means test,” or Form B22, which must be filed with your case. The means test looks at your monthly household income and expenses, using prescribed formulas in an effort to see if you should be required to file a chapter 13 repayment bankruptcy, instead of chapter 7, or establishing your payment level in a chapter 13 plan.
In Parts 1 and 2, we looked at how your monthly income is arrived at for use on Form B22. In Part 3, we will begin looking at the formula for your expenses. The subject of this article will be your ongoing monthly income withholding taxes.
Due to the ambiguous wording used on Form B22 for the category of withholding taxes, lawyers use different ways of calculating this important number, possibly reaching different results for similarly-situated clients. It’s easy to see why: Form B22 instructs you to fill in the average monthly amount of income withholding taxes you “actually incur.”
The use of the present tense verb “incur” is troubling, because the income figure used on Form B22 was incurred in the past six months. Does Form B22 really ask for your past income, and then ask for your present level of taxes you incur now? Literally speaking, that appears to be so. Is your head hurting yet?
The approach that makes the most sense is to disregard this linguistic inconsistency, and to simply assume that Form B22 intends that you use the taxes you incurred on the income earned in the preceding six months. After all, this is the income used to arrive at the average monthly income figure used on Form B22; what purpose would be served by using your current withholding tax figures (other than obeying the literal command of Form B22)?
Under this approach, then, you need to calculate the average monthly amount of withholding taxes you incurred on your income in the six month reporting period. The easy way to do this is to simply add up all the federal (including FICA), state, and local income taxes withheld from your paychecks in the six month period; then we divide the result by six. This gives us your average monthly income tax for use on Form B22. This is usually a pretty large number, so you can see why it’s important to get it right.
However, you may have noticed that the above approach has yielded the monthly tax withheld, rather the monthly tax incurred. Remember, Form B22 asks for tax incurred. To complete Form B22 correctly, it is necessary to keep this distinction in mind.
For persons with very stable and unchanging paychecks, who receive only a small tax refund or who owe only a small amount of tax every year, using the tax withheld closely approximates the tax actually incurred. However, for persons who usually receive a large tax refund, or for persons who are under-withholding and usually owe a large amount of income tax every year, using the tax withheld is definitely not equal to income tax actually incurred.
If you have been under-withholding, you will suffer a serious disadvantage in the means test if you use your income tax withheld. Don’t make this mistake. Instead, you and your lawyer should take the time to figure out what should have been withheld from your paychecks for withholding taxes. This will result in your having a larger figure on Form B22 for income taxes. This gives you a better outcome on the means test while simultaneously being more obedient to the language used on Form B22 (taxes you “actually incur”).
The income taxes which should have been withheld from your paychecks means the level of withholding taxes which would result in your not owing any tax when you eventually file your tax returns, and which also would result in your not receiving any tax refund either. We might describe this as “perfect withholding.”
Form B22 does indeed seem to require this approach, by its use of the phrase, taxes you “actually incur.” It’s certainly more correct to make the calculation this way, than it is to use income taxes withheld. If you take the time to understand this aspect of Form B22, you’re more likely to obtain a good result in your bankruptcy case.
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