Including additional taxes for 401(k) loans not allowed
Posted: Sat Jan 30, 2016 7:21 am
Reply-To: Roland Kedikian
X-Original-Return-Path: Roland Kedikian
To: cdcbaa@yahoogroups.com
X-Yahoo-Newman-Id: groups-system
I Would agree on including the 1/12 of all taxes due in schedule I and
means test. as an analogy, I have many times deducted the true amount of
taxes that must be deducted from a paycheck as opposed to what is being
deducted from the paycheck because often clients take the short term
approach of claiming more dependents to reduce the tax deduction only to
pay it at the end of the year because they need the money now.
I do put an explanation in schedule I that I did the above for the
trustee's attention.
Also the DOJ guideline for the means test also state to include the true
amount that must be deducted.
roland kedikian
On 1/29/2016 10:48 PM, jesseelaw@aol.com [cdcbaa] wrote:
>
> The 9^th Circuit in Egebjerg held 401(k) loans are not monthly
> payments on account of secured debts or other necessary expenses that
> can be deducted from a Chapter 7 debtor’s monthly income for purposes
> of calculating the debtor’s disposable monthly income under §
> 707(b)(2). In its analysis the 9^th Circuit states that "the loan
> repayments themselves are voluntary in the sense that Egebjerg can
> simply ask the loan administrator to treat his outstanding loan
> balance as an early withdrawal from his 401(k) and thereby relieve
> himself of a future repayment obligation. Doing so would have tax
> consequences, but Egebjerg would retain the use of most of the money
> loaned." Maybe that was the case with Egebjerg’s plan but my
> experience is that most employer’s plan do not allow it.
>
>
> The Ejegberg court acknowledges that there are tax consequences to the
> early withdrawal but does not address that impact on a Chapter 7
> debtor’s budget. If a debtor stops making 401(k) loan payments the
> remaining balance of the loan is treated as taxable income in the
> current year when the default occurs. Additionally there is a 10%
> federal and 2 ½% California early withdrawal penalty. Those taxes
> technically have to be paid in the current year.
>
> As the taxes are not a prepetition debt, but owed at the end of the
> year, it would seem to me a Chapter 7 debtor should be able to
> calculate the additional taxes owed as a result of the nonpayment of
> the 401(k) loan and add 1/12 of the additional taxes into his monthly
> expenses both on Schedules I/J and the Means Test. What say you?
>
>
> How about if the employer does not allow an employee to cease 401(k)
> loan payments because of financial hardship or Chapt 7 bankruptcy so
> long as employee remains employed and that employee does not plan to
> quit? Obviously if the 401(k) loan payments continue to be removed
> from each pay check, extra early withdrawal taxes will not be owed.
> That said, if a debtor is prohibited from including 401(k) loan
> payments in the means test calculation and in Schedule I/J (even
> though forced to pay them by the employer) should not the resulting
> taxes from those 401(k) loan payments noninclusion be allowed? Or is
> turnabout not fair play?
>
>
> Mark Jessee
>
>
The post was migrated from Yahoo.
X-Original-Return-Path: Roland Kedikian
To: cdcbaa@yahoogroups.com
X-Yahoo-Newman-Id: groups-system
I Would agree on including the 1/12 of all taxes due in schedule I and
means test. as an analogy, I have many times deducted the true amount of
taxes that must be deducted from a paycheck as opposed to what is being
deducted from the paycheck because often clients take the short term
approach of claiming more dependents to reduce the tax deduction only to
pay it at the end of the year because they need the money now.
I do put an explanation in schedule I that I did the above for the
trustee's attention.
Also the DOJ guideline for the means test also state to include the true
amount that must be deducted.
roland kedikian
On 1/29/2016 10:48 PM, jesseelaw@aol.com [cdcbaa] wrote:
>
> The 9^th Circuit in Egebjerg held 401(k) loans are not monthly
> payments on account of secured debts or other necessary expenses that
> can be deducted from a Chapter 7 debtor’s monthly income for purposes
> of calculating the debtor’s disposable monthly income under §
> 707(b)(2). In its analysis the 9^th Circuit states that "the loan
> repayments themselves are voluntary in the sense that Egebjerg can
> simply ask the loan administrator to treat his outstanding loan
> balance as an early withdrawal from his 401(k) and thereby relieve
> himself of a future repayment obligation. Doing so would have tax
> consequences, but Egebjerg would retain the use of most of the money
> loaned." Maybe that was the case with Egebjerg’s plan but my
> experience is that most employer’s plan do not allow it.
>
>
> The Ejegberg court acknowledges that there are tax consequences to the
> early withdrawal but does not address that impact on a Chapter 7
> debtor’s budget. If a debtor stops making 401(k) loan payments the
> remaining balance of the loan is treated as taxable income in the
> current year when the default occurs. Additionally there is a 10%
> federal and 2 ½% California early withdrawal penalty. Those taxes
> technically have to be paid in the current year.
>
> As the taxes are not a prepetition debt, but owed at the end of the
> year, it would seem to me a Chapter 7 debtor should be able to
> calculate the additional taxes owed as a result of the nonpayment of
> the 401(k) loan and add 1/12 of the additional taxes into his monthly
> expenses both on Schedules I/J and the Means Test. What say you?
>
>
> How about if the employer does not allow an employee to cease 401(k)
> loan payments because of financial hardship or Chapt 7 bankruptcy so
> long as employee remains employed and that employee does not plan to
> quit? Obviously if the 401(k) loan payments continue to be removed
> from each pay check, extra early withdrawal taxes will not be owed.
> That said, if a debtor is prohibited from including 401(k) loan
> payments in the means test calculation and in Schedule I/J (even
> though forced to pay them by the employer) should not the resulting
> taxes from those 401(k) loan payments noninclusion be allowed? Or is
> turnabout not fair play?
>
>
> Mark Jessee
>
>
The post was migrated from Yahoo.