Don’t miss the tax deductions hiding in your Chapter 13 bankruptcy.
The same, very important debts that your Chapter 13 plan pays are often tax deductible.
And you are still the person who’s paying, even if the trustee writes the check. Don’t miss out on those deductions.
Tax deductions in bankruptcy
Let’s look at some common deductions lurking in the Chapter 13 disbursements.
Mortgage interest If your Chapter 13 plan is catching up on delinquent mortgage payments, the claim of the lender is probably mostly interest.
Taxes Property taxes paid through the plan should be deductible. Likewise, state income taxes paid by the trustee are deductible.
Business expenses If you operate a business in Chapter 13 or operated one before you filed, you may be paying business leases, sales taxes, or vendor debt through the plan.
Get the info you need
In my experience, you have to dig out the information on deductible payments; I have not seen lenders sending 1098’s reporting mortgage interest paid to debtors when the checks come from the trustee.
But most if not all Chapter 13 trustees are on the web, and debtors can access the trustees reports of which creditors have been paid this year.
Pull up the report of last year’s disbursements and flag the payments that are deductible.
Save the printout of the trustee’s report in case of question by the taxing authority. The IRS will not have gotten a matching report from the lender who got the money and hasn’t reported it to you and the IRS.
How to treat 1099’s on foreclosures and short sales
Go back to prior tax years
If your plan is paying deductible expenses and you’ve been in the bankruptcy case for several years, you may want to look at prior year trustee reports. Overlooked deductions might justify going back to amend a prior return.
Tax returns are generally amendable for three years.
Check it out
Take this post with a grain of salt, or rather, take it to a tax professional.
I am a bankruptcy lawyer and what I know about taxes, I’ve learned on the job. But I am convinced that Chapter 13 debtors are missing legitimate tax deductions by overlooking what the Chapter 13 trustee has paid on their behalf.
More
How to find the mortgage interest paid by Chapter 13 trustee
What your tax professional should know about tax and bankruptcy
When your Chapter 13 plan struggles
Image courtesy of 401(k)calculator.org
Good advice, which I will pass on to my own clients!
I am a Tax Accountant and never even thought about this…The payments are 100% deductible and the mortgage companies should be issuing 1098 regardless of the source of the payments…
Great post
I’ve been trying to get the lender to understand that the “unapplied” payments were for back mortgage payments with principal, interest and taxes but they don’t seem to want to understand what I want. Trying to help others claim what should be deductible. No body seems to understand that these payments should be reported as deductible payments.