Many people over withhold taxes on their paychecks. In other words, they have more taken out so that come April 15, they will expect a nice refund rather than having to pay more to Uncle Sam. But over withholding can make preparing for a bankruptcy filing a little difficult. First, over withholding is not a good idea to begin with. And secondly, the money you’re withholding (and will ultimately get back) must be considered as part of your monthly income.
The desire to over withhold may exist for a variety of reasons. It may include a need to put money aside and not have the discipline to put it within reach, such as in a savings account where interest is earned. Since banks are still paying fairly lousy interest rates on savings accounts, there may be little incentive to put your money there. Lending it to the government interest free may be better than the whopping 2% you might earn on a savings account.
Over withholding might also stem from an prior experience of not withholding enough and ultimately, having tax delinquencies. Many of us have prepared our tax returns only to learn that despite our withholding (or lack thereof), we might owe Uncle Sam some scratch. In order to avoid it from happening again, some may have more taken out of their pay. It also might make April 15 seem so dreadful.
Practically speaking, over withholding is not a way to save money. The money you’re lending the government without interest and without any penalty or late charges could be used to pay monthly bills: bills that are not currently being paid…or are late. Plus, the government rarely expresses its appreciation for your kindness in lending it your money interest free.
Legally speaking, there are some things you need to know. If you’re thinking about chapter 7, your income tax refund might not end up in your pocket. Depending on what other property you hold, and the laws of your jurisdiction, part – or all of your income tax refund for 2008 might need to be paid to the chapter 7 trustee. That trustee will then split that up between your creditors.
Think about it – if your putting off the dentist, or not updating your eyeglass prescription because you think you cannot afford it until your income tax refund check comes in –you’re really not going to be able to afford it if your refund ends up going to the chapter 7 trustee, and not to the things you really need and should otherwise be paying for. Later this week, I’ll discuss a case that touches upon this issue.
Having too much taken out of your pay also impedes my ability to determine whether you can pass the means test, and whether you should actually be in a chapter 13. These are tasks I need to perform before you file bankruptcy, not after.
In the world of chapter 13, I believe many chapter 13 trustees have caught on to the concept of over withholding, and now routinely look at the income tax returns to see what the refunds have been. They then examine the schedules to see if those funds have been pro rated over 12 months. They also check the pay stubs to see what the withholding figures are. If your plan payment does not take into account income tax refunds, you can expect motions, problems and more anxiety than you probably need (and remember, you’ve probably had enough anxiety just coming to the realization that you may need to seek bankruptcy protection). Next week, I’ll have a case that addresses this issue.
Uncle Sam does not need your money for a short term loan (in theory…). The only one who should have your money is you. For now, examine what you’re withholding from your pay check and make the appropriate changes. If you think it’s too late to do anything, or if you have other questions or concerns about your particular situation (and if you’re from Massachusetts), please contact me. If you’re not from Massachusetts, please speak to an experienced and qualified bankruptcy attorney in your area. Be pro active and deal with these issues before filing your case. That way, everyone will know what they can expect, and more than likely, you case will move a lot smoother.
Storm Preparation is a weekly series appearing on Wednesdays and offers tips and information to people who think they may need bankruptcy protection in the future. Questions, comments or suggestions can be addressed to info@mcleodlawoffices.com.
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