Reducing the current monthly income (CMI) by necessary expenses

If your income is more than the median income as shown on the tables, you may reduce the CMI by deducting necessary living expenses and the living allowances established by the IRS under its National Standards and Local Standards. The IRS uses these National and Local Standards to determine a taxpayer’s ability to pay delinquent tax.

Food, clothing, and living expenses

Allowances for food, clothing, and other living expenses as set forth in the National Standards apply to every state in the U.S. The debtor (you) may deduct the amount established for his or her income level and family size as shown on the table, regardless of the amounts actually spent. The National Standards can be found on the IRS’s website or the U.S. Trustees website.

Housing, utilities, and transportation

Expenses for housing, utilities and transportation are set forth in the IRS Local Standards, which are derived from the Bureau of Census and the Bureau of Labor Statistics data. Local standards, also known as Collection Financial Standards, vary by state (and even by county within each state) and are divided into two categories: housing / utilities and transportation. Unlike the allowable expenses in the National Standard, a debtor is allowed to deduct expenses for housing, transportation, and utilities actually spent, or the Local Standard, whichever is less. The standards may be found on the United States Trustees’ website. Since housing and transportation expenses often include payments on a secured debt (mortgage and car payment), these expenses are listed separately under secured debts. Therefore, the amount spent on a mortgage must be deducted from the housing expense allowance and be included in the secured debt section of the form. Vehicle transportation costs are listed separately from vehicle ownership costs. The Local Expense Standards are listed by region rather than state (northeast, midwest, south, and west). The regions are further described by area. Values are listed for one and two vehicles. The transportation costs include operating and public transportation costs. The amounts allowed do not include personal property taxes. The vehicle ownership costs are national in scope. The amount of a debtor’s car payment is deducted from vehicle ownership costs and inserted in the secured debts part of the form. If the amount of the car payment exceeds the allowed amount of vehicle ownership costs, enter a zero; do not enter a negative number on the form.

Other necessary expenses

Other necessary expenses, as identified by the IRS for the area in which the debtor resides, include expenses for taxes, insurance (except homeowners, auto, or whole life premiums), court-ordered payments, child care, and healthcare. Other necessary expenses may be included if they meet the “necessary expense test.” To meet the necessary expense test, the expense must be for the health and welfare of the debtor’s family, or expenses necessary for the debtor to produce an income.

Example of calculations

Our debtor’s (this hypothetical was begun in the article on step 1 of the means test) necessary expenses are determined under the IRS standards as follows: National standard allowance for 2 persons: $985 National standard health care: ($60 x 2) = $120 Local standard housing and utilities: non-mortgage expenses (IRS website): $439 Local standard housing and utilities: mortgage/rent expense (IRS website): $965 Local standard transportation: vehicle operation (2 cars): $478 Local standard transportation: vehicle ownership: ($496 – $525) = 0 Taxes (income and payroll): $989 Employment expense (union dues): $57 Other necessary expenses (term life insurance): $45 Other necessary expenses: telecommunications (Internet): $52 Total Monthly Necessary Expenses Under IRS Standards: $4,130