Every year, the IRS takes a snapshot of what they consider to be a middle-class lifestyle. They assign dollar amounts to specific categories, including the following:
· Food, clothing, personal care products, and “miscellaneous”
· Out-of-pocket health care costs
· Vehicle ownership and operating costs
· Rent or mortgage
· Utilities, including gas, water, electric, cell phone, Internet, and more.
While these numbers are derived from federal studies, such as those from the U.S. Census Bureau and the Department of Labor, some of them would leave you scratching your head in confusion.
Even more confusing might be the regional variations for housing and vehicle operating costs. The IRS assigns these numbers at the county level, while not accounting for the fact that some counties can have huge variations in housing costs from one end of the county to another.
Now as a tax connoisseur, I find these numbers fascinating. But why should they be of any interest to you?
Well, the IRS uses these numbers, called Allowable Living Expenses, to determine how much of your income you’re allowed to spend on the basic necessities of living.
These only come into play if you owe back taxes to the IRS, and they don’t really matter that much if your tax debt is small and you’re “playing ball” with the IRS to address the situation.
But if you owe a substantial amount of money or have a history of naughty behavior with the IRS, then these definitely come into play. Once they do, the IRS suddenly has a lot of opinions regarding what you should and shouldn’t spend your own money on.
Of course, having a government agency tell you how much you’re allowed to spend on this or that is never a welcome thing and can create significant stress or even additional expense.
For example, if your current mortgage payment exceeds the IRS allowable amount for your family size, now is a really bad time to try buying a more affordable home. With the insanity in the housing market still going on, this becomes a “good luck with that” proposition.
So, what should you do when the IRS drops the hammer and tells you that you can only spend a certain amount of money on this or that?
The law allows the IRS to make exceptions to Allowable Living Expenses in certain situations. It’s also possible to make arguments to support higher expense limits. Lastly, there are times when we can convince the IRS to allow certain expenses that normally aren’t accepted. Getting the IRS to allow such conditional expenses isn’t easy, though, and requires significant attention to detail.
Of course, that’s where we come in!
If you, a relative, or a friend are facing the harsh limitations on allowable living expenses that the IRS imposes, we should talk about how to get that resolved for you:
Let us take care of the tax mess so that you can move on with your life.
Alexander Ming JP, BFC, CPA
Alexander Fitzgerald & Associates LLC enjoys shared ownership with Seraphim Wealth Advisors Inc.