Excess tax withholding is not the cause of every large tax refund as the chapter 13 trustees like to think. It makes a fat easy target for him to go after. I saw an objection to confirmation of a plan because a chapter 13 case analyst found an extremely large tax refund for which I did not prorate the entire amount as income. The trustee wanted the full proration committed to the plan. Why? Simple math. He collects 4% of every dollar his office pays out to creditors as trustee fees. It isn’t about greed, though. He has a statutory duty to insure that all available funds are paid out in the plan for the benefit of creditors.
The client in this chapter 13 is not a high income earner. He is not even a moderate income earner with excess tax withholding out of fear of owing the IRS. He is a young man who needs what a chapter 13 provides, and earns a very low wage working in a big box retailer. He lives with a girl friend, their child and another child. His tax refund is 80% due to earned income credit and additional child tax credits. Each of these is exempt under Ohio exemption law. That means creditors can’t reach the money from those credits.
If creditors can’t reach that money, how can the chapter 13 trustee do it on their behalf? The simple explanation is, “he can’t.” When I developed this client’s plan I took the total refund, and I subtracted the amount for the earned income credit and additional child tax credit. This calculation still left a bit of non-exempt tax refund. I did prorate this difference and included that as “other income” in Schedule I.
When I saw the objection to confirmation I reviewed my thought process just described with the attorney for the chapter 13 trustee assigned to the case. He agreed with my calculation and prorated inclusion of the non-exempt other income, and that the tax refund was not due to excess tax withholding. He requested I send him an email explaining this, and he would withdraw the objection to confirmation filed by his office.
Shortly after sending the email to the staff attorney, the client called in a panic because he had just received his copy of the trustee’s objection to confirmation in the mail. The objection asked for a monthly plan payment for three years which was more than double what he originally (and correctly) proposed to pay. He was relieved to discover I had already successfully challenged the issue with the chapter 13 trustee, For him, successfully refuting a claim of excess tax withholding made by the chapter 13 trustee will allow him to continue to support his small family and at the same time take control of his debt.