If you owe someone money and they take you to court and win, they can sometimes get a court order to garnish your wages. That means that your employer will have to set aside a portion of your wages to provide to the creditor, and you’ll never see that portion of your income on your paycheck. If you have your wages garnished to settle a debt that pays is still legally yours, so you can’t simply ask the Internal Revenue Service to deduct it from your income or ask for a refund of garnished wages on your taxes. It’s effectively the same as if you received your paycheck and then paid your creditor. On the other hand, if your wages are being garnished because you failed to pay for something tax deductible, the garnished amount may itself be tax deductible. For example, if you are being garnished to pay a medical bill, you may be able to apply the garnished amount toward the medical and dental expense deduction, which allows you to deduct medical expenses above 7.5 percent of your adjusted gross income, provided you itemize your tax deductions. If the debt is business related, you may be able to deduct the payment as a business expense, provided you use the cash method of accounting rather than the accrual method. That means that you claim business income and expenses as the money is received or paid rather than when they are first incurred. If you fail to pay your taxes, the IRS can put a levy on your various assets and on your wages. That allows it to seize money from your bank and other accounts and take at least a portion of your income. Generally some of your income is exempt based on the standard deduction and other exemptions you are due. Naturally, income paid to satisfy a prior tax debt to the IRS isn’t tax deductible from your current year’s tax bill, though it does help to satisfy previous years’ taxes.
Tax Law Changes in 2018
As of 2018, certain miscellaneous itemized deductions, such as employee business expenses, are no longer available to be claimed on your federal taxes. Additionally, the standard deduction is rising to $12,000 for single filers and $24,000 for married couples filing jointly. Those changes may make it less possible or useful to itemize deductions related to debts that you’re having settled through wage garnishment.
2017 Tax Law and Wage Garnishment
The lower standard deduction in 2017 of $6,350 for single filers and $12,700 for married couples filing jointly, coupled with additional allowable itemized deductions may make it more advantageous to itemize and claim deductions related to debts you see garnished from your paycheck.
How to Deduct Your Small Claims Court Judgments on Your Tax Return
Amounts you pay to fulfill a small claims judgement are not deductible on your tax return. However, the associated legal fees may be deductible. If you were awarded a small court claims judgment and you never received it, you can write off the balance as a bad debt.
In general, judgements levied on you through a small claims court case are not deductible expenses on your tax return. However, any attorney or legal fees you pay may be deductible. The IRS allows you to deduct legal fees if you paid the fees in an attempt to produce or collect taxable income, keep your job, for divorce advice or to collect taxable alimony.
Deducting Legal Expenses
Qualifying legal expenses are deductible on Schedule A as “other expenses.” List qualifying legal expenses on line 23, along with any amounts paid for investments and safe deposit boxes. Miscellaneous deductions like legal expenses are only deductible to the extent that they exceed 2 percent of your adjusted gross income. In order to claim the deduction, you must itemize deductions and forgo the standard deduction.
If you were owed a judgement through small claims court and you never received it, you may deduct it as a bad debt. This is only necessary if you were suing to recover an asset or amount previously paid to the debtor and you never received the proceeds from the judgement. In order to write off the bad debt, you must have taken reasonable steps to collect the amount owed.
Writing Off the Bad Debt
Bad debts can be written off as a short term capital loss capital loss on Form 8949. Record the name of the person who owed you the debt and the phrase “bad debt statement attached” in line one. For your basis in the bad debt, write the amount that you lent out or the value of the asset that was taken. Under proceeds, write zero. In the attached statement, detail the nature of the debt and explain that you never received the small claims judgement owed to you.
Tax Refund Offsets
Tax refund offsets are one of the government’s powerful tools to collect federal student loans. The government may take your income tax refund if you are in default. A number of states also have laws that authorize state guaranty agencies to take state income tax refunds. Computer records of all borrowers in default are sent to the I.R.S. Borrowers in default can expect to have all or a portion of their tax refund taken and applied automatically to federal student loan debt.
Challenging a Tax Refund Offset
You can request a hearing to challenge the tax offset. The I.R.S. has said that you must appeal to the Department of Education if you want to challenge an offset after it’s already been done. The Department of Education provides this explanation of tax offsets.
The main defenses to tax offset are (this is not an exhaustive list):
• You have repaid the loan,
• It is not your loan or there is some other reason why you do not owe the money,
• You have already entered into a repayment agreement with the loan holder and are making payments as required,
• You have filed for bankruptcy and the case is still open or the loan was discharged in bankruptcy,
• The school failed to pay you an owed refund,
• The borrower is dead or totally and permanently disabled,
• The loan is not enforceable, for example because of forgery, or
• You are eligible for a closed school discharge or false certification discharge.
If you want the offset to be on hold while you are challenging it, you must file a request for review at the address written in the offset notice by the later of 65 days after the date of the notice or 15 days after you request and obtain your loan file. It is a good idea to make this request so that you know what is in your file. You must make a written request if you want to see the loan file and you must do this within 20 days of the notice. You can request a hearing after these deadlines, but the offset will generally not be held up while you are waiting for your hearing.
Using Exemptions to Protect Your Wages From Garnishment
If you receive a notice of a wage garnishment order, you might be able to protect or exempt some or all of your wages by filing an exemption claim with the court. You can also stop most garnishments by filing for bankruptcy. Your state’s exemption laws determine the amount of income you’ll be able to keep. Some types of wages are fully exempt (although exceptions exist). Generally speaking, ordinary creditors cannot garnish the following types of income:
• social security
• child support, and
Wages, however, are almost always subject to garnishment unless you can claim an exemption of some sort. Lower income debtors might be able to keep all of their wages. Higher earners will likely lose a portion of their income.
How to File a Claim of Exemption
Before you can protect income, you must file a claim of exemption by filing a document with the court that issued the underlying garnishment order. Most courts will have a form for you to fill out. You’ll include:
• your name
• the name of the creditor suing you, and
• the case number.
You’ll also describe the exemption that will allow you to keep the greatest amount of your wages and provide any other required information, such as proof of your dependents. You’ll file the completed document with the clerk of court office in the county where the garnishment originated. Depending on your state’s laws, a hearing will probably be scheduled. You should plan on attending this hearing. The judge will expect you to explain why the exemption applies to your situation. If the judge agrees, the creditor will be ordered to reduce or stop garnishing your wages. If the judge disagrees, your wages will continue to be garnished.
Stop a Wage Garnishment by Filing for Bankruptcy
Bankruptcy works well to stop most wage garnishments and you don’t need to worry about losing everything you own. Property exemptions apply to more than just wages. Each state has a list of exemptions that a filer can use to protect property needed to maintain a home and employment, such as furniture, clothing, and a modest car. You’ll find the assets listed in each state’s exemption statutes. If you own an asset that appears on the list, you can exempt it.
Property not covered is nonexempt. Here’s what happens to nonexempt property in the two primary chapter types:
• Chapter 7 bankruptcy. The bankruptcy trustee an official selected by the court to oversee your matter will sell any nonexempt property and distribute the proceeds to your creditors.
• Chapter 13 bankruptcy. You can keep your nonexempt property, but you’ll have to pay the creditors its value (and possibly additional amounts) through a three- to five-year repayment plan. The rule is that you must pay either your disposable income or the value of your nonexempt property in your plan, whichever is greater.
Also, exempting property isn’t automatic. You’ll tell the court about an asset that you’re entitled to keep including wages by listing it on Schedule C: The Property You Can Claim as Exempt, one of the official forms that you’ll need to file to start the bankruptcy process. If you fail to do so, you risk losing the otherwise exempt property. Your wages may be garnished if you owe child support, student loans, or back taxes, or a court judgment has been entered against you. A wage garnishment is when a court issues an order requiring your employer to withhold a certain amount of your paycheck and send it directly to the person or institution to whom you owe money until your debt is paid off. Different garnishment rules apply to different types of debt and there are legal limits on how much of your paycheck can be garnished. If you lose a lawsuit and a money judgment is entered against you, the person or entity that won the lawsuit can garnish your wages by providing a copy of the court order to the local sheriff, who will send it along to your employer. Your employer must then notify you of the garnishment, begin withholding part of your wages, send the garnished money to your creditor, and give you information on how you can protest the garnishment. Unless you owe child support, back taxes, or student loans, your creditors the people you owe money can’t garnish your wages unless they first get a court order. For example, if you have defaulted on a loan, stopped paying your credit card bill, or have run up huge medical bills, your creditors can’t just start garnishing your wages. They must first sue you, win, and get a court order requiring you to pay what you owe. Federal law places limits on how much judgment creditors can take from your paycheck. The amount that can be garnished is limited to 25% of your disposable earnings (what’s left after mandatory deductions) or the amount by which your weekly wages exceed 30 times the minimum wage, whichever is lower. Some states set a lower percentage limit for how much of your wages can be garnished. You may not be fired or otherwise retaliated against because your wages have been garnished to pay one debt. Once you have one or more garnishments, however, less protection is available. Under federal law, you are not protected from retaliation if more than one creditor has garnished your wages or the same creditor has garnished your wages for two or more debts. Some states offer more protection. If you want to protest a wage garnishment, you must file papers with the court to get a hearing date. At the hearing, you can present evidence showing that you need more of your paycheck to pay your expenses or that qualify for an exemption. The judge can terminate the garnishment or leave it in place.
Defenses by Garnishee
A garnishee can oppose the garnishment by filing a motion with the Court. A garnishee is not required to turn over property that is not in its possession, or to collect from the debtor/employee any tips that have been paid directly to the employee by the employer’s customers. A garnishee may also claim that the garnishment sought by the creditor is exempt earnings that belong to the debtor. The court may release some or all of the property if the judgment has been vacated, has expired, or has been satisfied, if property is exempt, or if the creditor fails to comply with court rules.
Statement of Satisfaction
Once the total amount is paid off, the creditor must file a written statement indicating the amount has been satisfied. If they fail to do so, then the debtor may file a motion to declare that the judgment has been satisfied. If the creditor fails to comply with the provisions of the law, the garnishment may be dismissed and creditor may be assessed attorney’s fees and costs.
When you need legal help stopping a garnishment in Utah, please call Ascent Law LLC for your free consultation (801) 676-5506. We want to help you.
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States
Telephone: (801) 676-5506