Can I deduct charitable contributions or religious tithing when calculating the means test or Chapter 13 plan payment?
According to mashable.com the United States is one of the countries that topped the list of most charitable nations. In the U.S., 68% of the population donated to charity, while 79% helped strangers and 44% did volunteer work. It is no wonder that this topic is specifically addressed in the bankruptcy code. Charitable contributions can play a role when determining whether Debtors qualify for Chapter7. Charitable contributions are also factored into the Chapter 13 Plan Payment.
Chapter 7 Means Test and Charitable Contributions
Title 11 of the United States Code (USC) Section 707(b)1 allows Debtors to deduct a past pattern of charitable contributions. The contribution must qualify as a charitable contribution by the Internal Revenue Service under 26 USC Section 170 or a tax exempt organization under 26 USC 501(c)3. These organizations include churches, government entities for public use and charitable groups.
In Chapter 7, if your income is under the median income for a family of your size, you will qualify for Chapter 7. This is referred to as the Means Test. If your income is greater than the median income, you might still qualify by completing the long form of the means test. When completing this form, you can deduct a number of necessary expenses. This expenses also include Charitable and religious contributions as defined above. You are allowed to deduct up to 15 percent of your contributions so long as there is a past pattern of making these contributions. This means that you can’t just increase your contributions a month before you file bankruptcy in order to qualify for Chapter 7. There are many people in America that contribute 10 percent of their gross income towards Tithing. In essence, if they have no other charitable contributions, that entire amount could be used as an expense when conducting the means test.
Chapter 13 Payment Plan and Charitable Contributions
When you file Chapter 13, you and your attorney will develop a payment plan that can last from three to five years. You calculate the payment plan by subtracting your necessary expenses from your gross income. Necessary expenses include taxes, utilities, food and gas. Additionally, you can deduct your charitable contributions and tithing up to 15 percent of your gross income. However, be prepared to show proof of these charitable contributions to the court or bankruptcy trustee. They will want to make sure that there has been a pattern of contributions. In other words, the Trustee, creditors and the court may object to your charitable contributions if you started right before the bankruptcy for the purpose of keeping your plan payment down.
Remember it is always important to discuss your options with a bankruptcy attorney.