Are Chapter 13 Payments Tax Deductible? What You Need to Know
Learn how Chapter 13 bankruptcy payments are treated for tax purposes, which components may qualify for deductions, and how to properly document and claim them.
Filing for Chapter 13 bankruptcy involves a repayment plan, leading many to question if these payments can reduce their tax burden. While the payments themselves aren’t directly deductible, the situation is nuanced. Certain debts paid through the plan might retain their tax-deductible status.
Understanding this distinction is important for accurate tax filing and avoiding potential issues or missed savings. Let’s examine which components of your Chapter 13 payments could qualify for deductions, which cannot, and how to handle them correctly on your tax returns.
Details on Payments That Might Be Eligible
Generally, payments made to a Chapter 13 trustee are not deductible. However, if your plan allocates funds to pay specific debts that are normally deductible, those portions may still qualify. You are considered the payer of these underlying debts, even though the trustee distributes the funds.
A common example is home mortgage interest. If your plan covers past-due or ongoing mortgage payments for your main or secondary home, the interest portion might be deductible. This aligns with standard IRS rules (often detailed in IRS Publication 936), typically limited to interest on acquisition debt up to $750,000 (for debt after Dec. 15, 2017) or $1 million (for debt on or before that date), provided the loan was used to buy, build, or substantially improve the home.1U.S. House of Representatives Office of the Law Revision Counsel. 26 U.S. Code § 163 – Interest Interest on home equity debt used for these purposes may also qualify.
Property taxes paid on your primary residence through the Chapter 13 plan can also often be deducted, following the usual IRS guidelines as if you paid them directly.
For those operating a business during Chapter 13, plan payments covering certain business expenses could be deductible. If the plan pays for items like business leases, vendor debts, or specific business-related taxes, these amounts might be claimed on your business tax schedule (like Schedule C). These must be ordinary and necessary business expenses that would qualify outside of bankruptcy.
Alimony (spousal support) payments made via the plan may be deductible by the payer, but this depends entirely on the date of the divorce or separation agreement. For agreements executed before January 1, 2019, these payments are generally deductible by the payer. For agreements executed after December 31, 2018, alimony is no longer deductible. IRS Publication 504 provides details. Payments designated as child support are never deductible.
Ineligible Payment Components
Many parts of your total payment to the Chapter 13 trustee are not tax deductible. It’s necessary to identify these ineligible components for correct tax filing.
A significant portion often goes toward the principal balance of debts like mortgages, car loans, or personal loans. Repaying the principal amount borrowed is never deductible as it’s considered a return of capital, not an expense.
Interest paid on most consumer debts within the plan is also generally non-deductible. This includes interest on credit cards or personal loans not secured by a qualified home and used for personal reasons. The Internal Revenue Code broadly disallows deductions for personal interest for individuals.
Payments allocated to governmental fines or penalties, such as traffic tickets or court-ordered fines included in the plan, are typically non-deductible under Internal Revenue Code Section 162.2Cornell Law School Legal Information Institute. 26 U.S. Code § 162 – Trade or Business Expenses
Administrative costs of the bankruptcy case, specifically the fees paid to the Chapter 13 trustee for managing the plan, are generally not deductible for individuals. The Tax Cuts and Jobs Act of 2017 suspended miscellaneous itemized deductions subject to the 2% adjusted gross income floor (which might have previously covered some bankruptcy costs) for tax years 2018 through 2025.
Finally, any portion of a Chapter 13 payment designated as child support cannot be deducted by the payer.
How to Document Potential Deductions
Accurate record-keeping is essential to substantiate any potential deductions arising from Chapter 13 payments. Since you make one payment to the trustee who then distributes it, you need proof of how the funds were allocated.
The primary documentation comes from the Chapter 13 trustee’s reports, often issued periodically (e.g., annually) and at the plan’s conclusion. These Reports of Receipts and Disbursements detail funds received from you and payments made to each creditor.
Trustee reports might not always break down payments sufficiently for tax purposes (like separating mortgage interest from principal). Therefore, obtaining documentation directly from creditors is advisable. Keep mortgage statements from your lender, which typically itemize interest and principal. Obtain records from local tax authorities confirming property tax payments made by the trustee.
If claiming business-related deductions paid through the plan, maintain standard business records like invoices, receipts, and lease agreements. These documents help prove the expenses were ordinary and necessary for your business. Keep all supporting records for at least three years after filing your tax return, though longer periods (up to seven years) may apply in certain situations.3Internal Revenue Service. Managing Your Tax Records After Filing Diligent record-keeping throughout the bankruptcy and for several years after is recommended.
How to Claim on Tax Returns
To claim eligible expenses paid through your Chapter 13 plan, report them on the correct forms with your Form 1040 tax return.
Personal deductions like qualified home mortgage interest and state and local property taxes are itemized on Schedule A (Form 1040).4Internal Revenue Service. 2024 Instructions for Schedule A (Form 1040) Mortgage interest typically goes on Line 8a, and real estate taxes on Line 5b. Note the annual limit for state and local taxes (including property, income, or sales taxes) is generally $10,000 per household.
Claiming deductions on Schedule A requires you to itemize instead of taking the standard deduction. Compare your total itemized deductions (including Chapter 13-paid items and others like qualifying medical expenses or charitable gifts) to the standard deduction for your filing status ($14,600 Single/MFS, $29,200 MFJ/QSS, $21,900 HOH for 2024).5Internal Revenue Service. IRS Provides Tax Inflation Adjustments for Tax Year 2024 Choose the method that provides the larger deduction.
If your plan covered deductible business expenses (for sole proprietors), claim them on Schedule C (Form 1040), Profit or Loss from Business. These expenses reduce your gross business income.
For deductible alimony payments (from pre-2019 agreements), report the amount paid on Schedule 1 (Form 1040), Part II, Adjustments to Income, Line 19a. You must also provide the recipient’s taxpayer ID number and the date of the original agreement. Ensure amounts claimed align with your trustee reports and creditor documents.