Chapter 13 Bankruptcy Tax Deductions
The following information comes from articles by Cathy Morgan and Rebecca McDowell published on July, 2017 and found at The Bankruptcy Soap Box and Pocket Sense websites. This does not constitute legal advice from Marcus H. Herbert & Associates or the Bankruptcy Advocates law firm. Please consult your tax preparer about these ideas when you are preparing your tax returns. This is being offered for informational purposes only.
If you are in a Chapter 13 bankruptcy, several lesser-known tax deductions are available if you file your tax return with itemized deductions. You can take the standard deduction when you file your tax return, or you can itemize your deductions. A tax deduction is an expense that can reduce your annual taxable income and decrease the amount of taxes owed.Mortgage Interest Deduction
There is a deduction available to you in the annual Trustee's disbursement report if you are catching up on mortgage arrearages. Each monthly mortgage payment has a substantial amount of interest besides the principal balance. The amount paid toward interest is deductible on an itemized tax return.Property Tax Deduction
Some Chapter 13 plans include property taxes. If your repayment plan includes past-due property taxes, some jurisdictions allow a deduction for those payments. However, the claim filed by the taxing authority might include late penalties and court fees. These extra fees are not deductible.Deductions for Maintenance or Alimony Payments
If you have court-ordered maintenance or alimony payments, you can deduct those payments from your taxable income. If your repayment plan includes a claim for maintenance or alimony arrears, the portion of the payment attributable to the alimony claim is deductible. However, note that maintenance and alimony payments are not the same as child support payments. You can't deduct the payments toward child support arrearages.Where Is the Deductible Amount Information?
The annual disbursement report shows how much was paid toward claims in your repayment plan. Locate the claim by debt type or lender. The annual report should show how much was paid towards the principal balance and how much towards interest. This depends on your jurisdiction and Trustee.Here is an article with instructions to calculate the interest if it is not listed on your report.
Keep Tax Deduction Documentation
The IRS uses 1099 forms to verify the deduction amounts. Most lenders do not claim Chapter 13 payments as interest. You will need to keep your documents to verify your deduction claims should you receive an inquiry from the IRS regarding the deduction.
The suggested documents to keep copies of are the lender's proof of claim, the annual Trustee’s disbursement report, a copy of your repayment plan, and supporting tax documents.