"Just before the 2024 tax return filing deadline, someone reached out to me because he was facing a very large tax bill. I asked him why this happened, and he said it was because he made more money than he thought and apparently didn't make enough estimated tax payments or withholdings from his paycheck. While I suspected that his income "problem" could be better addressed by a financial advisor, I thought my experience assisting people with tax problems could help."
"I then asked him how often he checks his bank account and his cash flow. He says that he used to check his bank account regularly but now only does so periodically. He said that looking at his bank account sometimes made him feel nervous. I next asked him how he calculated his gross income. He said that he downloaded a spreadsheet from his bank account and added up all of his deposits."
"He said that in addition to being in higher income tax brackets, he also lost deductions, and had to pay the net investment income tax. To top it off, his new income made him ineligible for the health insurance tax credit and he had to pay back the subsidy through his income tax return. In most cases, the subsidy amounts to a few hundred dollars per month to cover a portion or all of the monthly health insurance premiums."
A self-employed individual who saved a percentage of earnings faced a large unexpected tax bill after making more money than anticipated and underpaying estimated taxes or withholdings. The individual stopped monitoring cash flow regularly and calculated gross income by summing all bank deposits, potentially counting non-income items. Higher income pushed the taxpayer into higher tax brackets, reduced deductions, and triggered the net investment income tax. Increased income also made the taxpayer ineligible for the health insurance tax credit, resulting in subsidy repayment obligations that added several thousand dollars to the tax bill.
Read at Above the Law
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