Why this matters
Calculating reasonable monthly living expenses shows how much, if anything, you can afford to pay toward outstanding debts. Courts, the IRS, and private collectors use these figures to set payment plans, approve hardship status, or evaluate offers in compromise. Accurate, documented calculations improve negotiation outcomes and reduce the risk of wage garnishment or levies.
Step-by-step: How to calculate reasonable monthly living expenses
- Gather baseline documents
- 3 months of bank and credit-card statements, pay stubs, bills, and receipts.
- Proof of regular income and any irregular income sources (self-employment, rental, etc.).
- Decide whether to use standards or actuals
- IRS Collection Financial Standards provide National Standards (food, clothing, household) and Local Standards (housing and utilities) that the IRS uses for federal tax collections (see IRS Collection Financial Standards: https://www.irs.gov/individuals/collection-financial-standards).
- For private collectors or courts, you may present actual documented costs if they are reasonable and verifiable.
- For IRS cases, use Form 433‑A or 433‑B as your financial statement (see Preparing a Financial Statement (Form 433‑A/B) for Collections: https://finhelp.io/glossary/preparing-a-financial-statement-form-433%e2%80%91a-b-for-collections/).
- List expense categories and rules of thumb
- Housing & utilities: rent/mortgage, HOA fees, homeowners insurance, electricity, water, sewer, trash, heat. Use local standard or actual with receipts.
- Food, clothing, household supplies: typically covered by IRS National Standards.
- Transportation: car payments, fuel, insurance, repairs, public transit; IRS allows a standard expense or actual cost for business-use vehicles.
- Health care: insurance premiums, out-of-pocket medical expenses, prescription costs (document with bills).
- Childcare/dependent care and court-ordered support: allowable with proof.
- Taxes and mandatory payroll deductions: include as necessary obligations.
- Calculate monthly totals and monthly surplus
- Add monthly essential expenses and subtract from monthly net income to find surplus (or deficit).
- If surplus is minimal or negative, use that to negotiate a lower payment or request hardship status.
- Document everything
- Keep invoices, canceled checks, bills, insurance statements, childcare receipts, and a spreadsheet showing the math.
- The IRS and courts prefer contemporaneous records; collectors will accept bank statements and bills as proof.
How collectors and the IRS use the numbers
- IRS: Uses Collection Financial Standards and Form 433 series to evaluate installment agreements, collection alternatives, and hardship (see IRS CF Standards). For details on how the IRS determines living expenses, see our explainer: How the IRS Determines Reasonable Living Expenses in Collections (https://finhelp.io/glossary/how-the-irs-determines-reasonable-living-expenses-in-collections/).
- Private collectors and courts: May accept documented actuals or negotiated budgets; they often press for conservative estimates.
Example (illustrative)
- Net monthly income: $3,500
- Essential expenses (using a mix of IRS standards and actuals):
- Housing & utilities: $1,200
- Food & household: $450
- Transportation: $300
- Healthcare (out-of-pocket): $150
- Childcare/support: $400
- Other required expenses (insurance, taxes): $200
- Total essential expenses: $2,700
- Monthly surplus for debt payments: $800
Use this surplus to propose a monthly payment amount; if the collector disputes the figures, present documentation and cite applicable standards.
Common mistakes to avoid
- Inflating expenses without documentation — this undermines credibility and can have legal consequences.
- Omitting variable or seasonal expenses (e.g., quarterly insurance, medical procedures).
- Forgetting to use Local Standards where applicable for housing/utilities when dealing with federal collections.
Professional tips
- Maintain a rolling three-month expense file; update it after major life changes (move, job change, new child).
- If you are self-employed, smooth irregular income by averaging last 6–12 months of net income.
- When negotiating with the IRS about hardship or an Offer in Compromise, reference current CF Standards and submit Form 433 as directed (see Preparing a Financial Statement (Form 433‑A/B) for Collections: https://finhelp.io/glossary/preparing-a-financial-statement-form-433%e2%80%91a-b-for-collections/).
- If your out-of-pocket costs are unusually high, attach a written explanation and supporting bills.
When to seek help
If calculations are complex (multiple incomes, fluctuating self-employment receipts, or significant medical expenses), consult a CPA, tax resolution professional, or consumer credit counselor. For IRS-specific hardship relief and procedural guidance, our guide on applying for hardship during IRS collections may help: How to Apply for Hardship Relief During IRS Collections (https://finhelp.io/glossary/how-to-apply-for-hardship-relief-during-irs-collections/).
Professional note: In my 15 years helping clients through collections, precise documentation—more than clever budgeting—wins negotiations. Take time to assemble clear, verifiable records before making offers.
Disclaimer: This article is educational and not individual tax or legal advice. For tailored guidance, consult a qualified tax professional or attorney. Authoritative sources include the IRS Collection Financial Standards (https://www.irs.gov/individuals/collection-financial-standards) and the Consumer Financial Protection Bureau (https://www.consumerfinance.gov).
