Other Necessary Expenses the IRS Allows Beyond the Standards

A frequent mistake on self-prepared financial statements is not lying. It is leaving money on the table. Taxpayers list rent, food, and the car, and then stop. Meanwhile they are paying child support, union dues, and a term life premium that the IRS would have allowed if anyone had written them down.

The legal test

IRM 5.15.1.8 defines the necessary expense test: expenses "necessary to provide for a taxpayer's and his or her family's health and welfare and/or production of income." Other Necessary Expenses meet that test "and normally are allowed." The amount must be reasonable considering the taxpayer's facts and circumstances.

The detailed list is in a table in IRM 5.15.1.11. Here is what it says, item by item, in plain English.

Court-ordered payments

Alimony, child support, including state orders, and other court-ordered payments are allowable "if alimony and child support payments are court ordered and being paid." The phrase "being paid" matters. If payments are not being made, the expense is not allowed "unless the non-payment was due to temporary job loss or illness." Restitution paid to other victims under a court order is also allowable.

The IRM warns that a court order does not make every item in it allowable. A child's college tuition in a divorce decree, for example, "would not otherwise be allowable as a necessary expense." Form 433-A line 43 is court ordered payments. Bring the order, the signature page, and proof of payment, such as canceled checks or pay stubs showing the deduction.

Child care

Babysitting, day care, nursery and preschool are allowed "if it meets the necessary expense test," and only reasonable amounts. The IRM tells employees not to allow "unusually large child care expense if more reasonable alternatives are available," and to consider the child's age and whether both parents work. Form 433-A line 44 is child and dependent care.

The regulation behind hardship, Treasury Regulation 301.6343-1(b)(4)(ii), specifically lists "child care payments which allow the taxpayer to be gainfully employed" as a cost the IRS must consider.

Dependent care for the elderly or disabled

Care for an elderly, handicapped or otherwise disabled person is allowed "if there is no alternative to the taxpayer paying the expense." Document why no one else, and no program, is covering it.

Term life insurance

Life insurance is allowed "if it is a term policy on the life of the taxpayer only." Whole life policies are treated differently: "these should be reviewed as an asset for borrowing against or liquidating. Life insurance used as an investment is not a necessary expense." Line 45 on Form 433-A. More on cash value policies in life insurance in the IRS financial analysis.

Current year taxes

Current federal income tax, FICA, Medicare, and state and local taxes are allowed. IRM 5.15.1.11: "Current taxes are allowed regardless of whether the taxpayer made them in the past or not." For wage earners, that is withholding. For the self-employed, it is estimated payments. Form 433-A line 46. This is one reason to report gross wages rather than take-home pay: the withholding comes back to you as an allowed expense.

Involuntary deductions

Union dues, uniforms, and work shoes are allowed "if it is a requirement of the job." Annual costs are divided by 12. The hardship regulation also lists "dues for a trade union or professional organization" as a cost necessary to produce income.

Education

Education is allowed in two situations: when "required for a physically or mentally challenged child and no public education providing similar services is available," and for the taxpayer "if required as a condition of employment." The IRM's examples include an attorney's required continuing education and a teacher whose pay or position depends on credits.

Accounting and legal fees

Fees for representation before the IRS, "to resolve current balances due, delinquent returns, examinations, etc.," are allowed when reasonable and not excessive for the complexity of the case. Business-related fees belong on the business side, not as personal expenses. This is the IRS acknowledging that getting help to resolve the case is a legitimate cost of resolving it.

Charitable contributions

Generally disallowed. The exception is a contribution that "is a condition of employment or meets the necessary expense test," such as a minister required to tithe by an employment contract. Weekly church giving, however sincere, will not be allowed.

Secured debts

Payments on secured or legally perfected debts are allowed "if it meets the necessary expense test," with proof the payments are being made. Form 433-A line 47 asks you to attach a list. A loan secured by a necessary asset fits. A loan secured by a boat usually does not.

Repayment of loans used to pay federal taxes

If you borrowed money and the IRS received the proceeds, the payment on that loan should be allowed if you can document the loan. This is the IRS's own incentive to borrow and pay.

Student loans and delinquent state taxes

Both have their own rules. Student loans are allowed if federally guaranteed and for the taxpayer's own post-secondary education, with proof of payment. Delinquent state and local taxes are allowed under a percentage allocation. See credit cards, student loans and unsecured debt and delinquent state taxes and IRS hardship.

What is generally not allowed

Form 433-A's own instructions list expenses "not generally allowed": "tuition for private schools, public or private college expenses, charitable contributions, voluntary retirement contributions or payments on unsecured debts." The form adds that these may be allowed "if proven that they are necessary for the health and welfare of the individual or family or the production of income."

On voluntary retirement contributions, IRM 5.15.1.28 is pointed. Employees are told to advise taxpayers that contributions to voluntary plans "are not a necessary expense," and that continuing them "while asserting an inability to pay an amount that is owed, may be considered flagrant conduct, and could result in a levy on retirement accounts." If you are asking for hardship, stop the voluntary 401(k) deferral first. Employer-required contributions are a different matter, and Form 433-F lists them separately.

Conditional expenses and the six-year rule

IRM 5.15.1.11 also describes Other Conditional Expenses, which "may not meet the necessary expense test, but may be allowable based on the circumstances of an individual case." It adds that if the tax liability, including accruals, can be paid within six years and within the collection statute, all expenses may be allowed if reasonable. That six-year rule is an installment agreement tool. In a true hardship case, where the taxpayer cannot pay anything, it rarely comes into play.

Expenses paid other than monthly

Many of these costs are not billed monthly. Uniforms are bought once a year. Union dues may be quarterly. Term life premiums are often annual. The Form 433-F instructions give the conversions: divide quarterly amounts by 3, multiply weekly amounts by 4.3, biweekly by 2.17, and semimonthly by 2. For annual bills, IRM 5.15.1.3 tells employees to compute the total cost for the year and divide by 12. Do that math yourself so the monthly figures on your form are accurate.

Put everything on the form

The IRS will not go looking for expenses you forgot. It will look for income you forgot. List every necessary expense with the documentation to support it, and let the employee decide what is allowed. A complete list is also a credibility signal: it shows you understand the rules and are not padding the numbers.

Child support, union dues, the term policy that protects your kids. Those are not luxuries. Make sure the IRS sees them.