Chapter 13 Tax Deductions

Did you know that some of the payments you make under your chapter 13 bankruptcy plan are tax deductible? Although it is your bankruptcy trustee who controls your purse strings, it is still you who are deemed to be the payer. So what are some Chapter 13 tax deductions you may be eligible for? Click here to read or watch more IRS Help resources.

Payments towards mortgage interest in Chapter 13 bankruptcy and/or defaulted mortgage payments may be deductible. This is because your lender’s filed proof of claim in the bankruptcy case is likely to be interest on the loan which accrued but was not paid before the case was filed. And the good news is that mortgage interest can be deducted if you itemize deductions.

The problem is most lenders do not send 1099s reporting mortgage interest paid when the checks come from the trustee. But there is a way around this. Find your trustee’s website and look for the trustee’s report that shows the names of the creditors that have been paid for any tax year. If you can’t sort the information for disbursements in a given tax year, you can look at the ledger of all disbursements, then flag and add up all the payments to your lender. Since the IRS relies on 1099 forms sent to them, with copies to the taxpayer, they will not have gotten a matching report from the lender who got the money and hasn’t reported it to you and the IRS.

So you should obtain a copy of the bank’s proof of claim, print out the trustee’s disbursement records, and document them along with a copy of your plan with your supporting tax documents. These documents will enable you to back up your claim for tax deduction.

Another chapter 13 tax deductible expense is property taxes paid through chapter 13. Likewise, state income taxes paid by the trustee are deductible. In addition, if you are a business owner in chapter 13 or were running a business before you filed, you may be paying business expenses such as leases, sales taxes or vendor debt through your chapter 13 plan. All these expenses may be tax deductible.

You should do the same thing as for your mortgage payments to claim your tax deductions for property taxes and business expenses also.

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