Allowable expenses are the expenses the IRS considers to be necessary in the production of income or to provide for the health and welfare of the taxpayer’s family. The allowable living expense standards include national and local standards. Generally, the IRS will update their allowable standards once a year.
The national standards for food, clothing and other items and out-of-pocket health care expenses are based on the number of people in the household. For example, for a one person household in 2015, the allowable standard for food, clothing and other items is $585 per month and out-of-pocket health care expenses is $60 per month if the taxpayer is under 65, $144 per month if the taxpayer is 65 or older. However, if the out-of-pocket expenses are higher than the allowable standards, the taxpayer must provide proof of the monthly expenses.
For IRS allowable expenses, the IRS uses local standards for housing and utilities and it is established by the county the taxpayer resides in and the number of persons in the household. For example, in 2015, for a two person household in Los Angeles County, the allowable standard is $2,270. If the actual expenses are lower than the standards, the IRS will allow the actual expenses. However, if the actual expenses are higher, than the standards, the IRS will apply the standards. Note that if the taxpayer’s filing status for the last filed tax return is single, the IRS will use the allowable standard for one person, even if there are two people in the household.
The IRS also has local standards for transportation costs such as auto ownership cost and operating costs. The transportation standards for auto ownership are based on nationwide figures and allows a single taxpayer up to $517 per one person for a car payment. If however, the actual car payment is lower than $517 per month, the IRS will accept the lesser of the two. There are also additional allowable amounts for operating costs such as car registration, car insurance, fuel, parking, maintenance, etc. based on the region the taxpayer resides in. For example, if a taxpayer resides in the Los Angeles metropolitan region, the standard is only $295. Generally, the IRS will not allow the transportation costs for the children in the household.