Personal Finance
My Disastrous Tax Season: Where I Went Painfully Wrong
Well, it’s Tax Day once again — which means that procrastinators like me are getting ready to send off our payments. After all, while I understand wanting to get a refund ASAP, who would want to pay money a minute earlier than required?
Speaking of paying money, this weekend brought the realization that my wife and I owe way more to the Internal Revenue Service than we anticipated. Like, way way more. In total, we’re talking nearly $10,000 we now need to pony up in *checks wristwatch* hours.
But how did this happen? I mean, I write about personal finance for a living (and apparently have the income to prove it!), so how could I have screwed up so royally? Well, while I will take full blame for the predicament, there were a few factors at play that led to my demise.
With that, let’s dive into what happened with my taxes this year, what I’m going to do about it now, and how I’m looking to change things going forward.
How My Tax Problem Snuck Up On Me
Last Minute Filing
As I mentioned, knowing that I was going to have to end up paying the IRS, I wasn’t in too much of a rush to get my filing done (granted, this was back when I thought we’d owe a manageable sum of money). On top of that, I was debating what tax prep service I wanted to use this year so that I could then review whichever one I chose. Unfortunately, although I ended up starting our taxes a couple of weeks ago, I clearly prioritized the wrong things.
In my mind, what I needed to do most was go through my Schedule C deductions. This meant reactivating my Quickbooks account, spending the day ensuring that all my credit card transactions were imported correctly, and then going through to categorize them. Once that was done, I launched HR Block (the platform I elected to try) to enter some of my income and learn where to plug in said deductions.
The problem is that I didn’t think to add the most impactful info until just this past weekend. Specifically, one of my wife’s 1099s. Again, you’d think that I would have thought of this sooner — but I was still operating under the mistaken belief that she’d been at her current W2 job longer than she had. In turn, her 1099 income was much larger than I realized… which only helped to exacerbate the hefty tax bill. Sigh.
By the way, after seeing how much we tentatively owed, I tried TurboTax (which I previously used and knew how to navigate) to confirm. Then, not wanting to have to pay for either one of these services on top of my tax bill, I did my taxes for a third time using Cash App Taxes. With all of that, I plan to file using Cash App Taxes since it is free.
Our Weird Income Mix: W2s and 1099s
Over the past several years, our income mix has changed quite a bit. Once upon a time, we were both W2 employees. Then, I became self-employed while she still had a W2. After that, though, she too became self-employed, which is how it stayed… until one of my former 1099 gigs switched to regular employment. Finally, in the middle of last year, my wife took a new position and returned to W2 work. So we’re now both W2s, but with 1099 income as well.
Sound confusing? It is! But what makes it worse is that, to me, our main jobs are W2 and, thus, should be doing a lot of the withholding we need, right? That would be true if they were our only income. In reality we earned more through our “side gigs” during the year than I had anticipated.
This is where the bulk of our bill comes in, but it wasn’t the only factor.
Moving Medical Insurance Plans: Paying Back ACA
Being self-employed, we used the healthcare marketplaces created by the Affordable Care Act (Obamacare, colloquially) for our health insurance. Based on our income, we qualified for a significant subsidy on our premiums. But, once my wife took a full-time W2 that offered health insurance, we were no longer eligible for this plan or the subsidy, so we ended our coverage last summer.
Here’s the thing, though: even though we qualified for that subsidy level based on what we were making during the months that we had a marketplace plan, my wife making more at her new job meant that our overall income for the year was higher (duh). Because of this, we now have to pay back part of the subsidy we received, even though the “overearning” came after we’d already ended our plan and, thus, stopped using the said subsidy.
All told, this payback makes up about 20% of what we owe this year.
Where Did the Money Go?
That’s a great question, isn’t it? You’d think that, if we apparently made so much money, we’d have plenty lying around, in which case we could just pay off our tax bill without issue. Sadly, that’s not quite the case.
While I won’t sit here and list everything we purchased in the past year, I will highlight two areas that have impacted our spending last year.
Increased Health Insurance Cost
The irony of having to pay back some of the money we received to pay for our health coverage is that we actually pay far more out of pocket now than we did previously. Yes, this is absolutely because of the subsidy we had — but it still stings.
Basically, if it were just my wife getting insurance through her job, she’d have a pretty sweet deal. But, adding me as a non-employee is where the expense comes in. As a result, we are now personally paying eightfold for coverage compared to our ACA plan.
Home Expenses
At the end of 2023, we purchased a house. That means that 2024 was our first full year as homeowners. As I write about on a semi-monthly basis, for all that’s great about owning a home, there are plenty of downsides as well — namely in terms of expenses.
Moving to a house meant increased utilities (including paying for some that were previously included in our rent, such as Internet), paying for repairs (like our water heater), and of course paying for our mortgage/insurance/property tax. Naturally, the latter two also went up recently. Surely, these expenses took some of our free cash away during the year.
Moving Forward: Current Options and Future Solutions
Why Not Just File an Extension?
If your first thought when reading about the debacle is that I should just file an extension, I have bad news for you. Although it is possible to get an extension and not have to file until October, you’re still expected to pay by April 15th. How do you pay if you don’t know what you owe? Well that’s just part of the IRS fun, isn’t it?
In any case, since the problem is getting the money together and not necessarily the paperwork, filing an extension isn’t really helpful.
Payment Plan
The first real option we have is to set up a payment plan with the IRS. From what I’ve read, if you owe less than $10,000, you’re more than likely to be approved for this. That said, it’s not free.
In my research, I found that the IRS currently charges 7% interest per year, which is compounded daily. Plus, they charge a 0.5% monthly fee.
I’ll spoil it now: this is probably our best bet. Specifically, I think we can pay a nice chunk of the balance now but then pay off the rest in the next few months (under six). It’s not ideal, but it could be worse.
Get a New Credit Card?
Another option I considered is possibly putting our tax bill to work for us in a way. I’ve actually kind of done this already as I made a $2,000 payment on a credit card I recently opened. Even though I had to pay a 2.89% processing fee on this transaction, the welcome bonus I’ll receive will far exceed that. This got me thinking: what if I repeat this to claim another credit card welcome bonus — and get some extra float time in the process?
There are a couple of cards possibilities, each with their own pros and cons. First up, the Capital One Venture Card currently has an offer where I could get 75,000 miles (so let’s call it $750) plus $250 in travel credits for Capital One Travel after spending $4,000 on the card within three months. Interestingly, the processing fee for consumer cards is lower than business ones at 1.75%, so the fee on a $4,000 payment would be $70 and the card has a $95 annual fee. Still, that would theoretically net me $585 in cash that I could then use to pay down the balance — and I’d get another $250 we could use toward a much-needed vacation. Actually, we’d also earn 2x miles on the $4,070 payment plus fee, so that’s another $81.40 cashback. As for float time, I’d estimate that our bill would likely be due around early June, so six weeks?
The other credit card option I’d consider is the Citi Double Cash Card. In terms of bonus, this one’s much smaller at $200 (after $1,500 in spending). We’d also get a total of 2% back, similar to the Venture. But the key perk here is that the Double Cash card currently has a 0% APR for 18 months offer. This means that we could take our time paying off the card if we wanted. Additionally, there’s no annual fee to consider.
Honestly, while I love the idea of the Venture card bonus, I’m not sure we’ll ultimately do this. For one, my wife already says we have too many credit cards. Beyond that, there are also a few key unknown factors such as 1) whether I’d get approved and 2) whether I’d get my card number instantly (you’re supposed to but who knows). Those may be enough to keep me away, but we’ll see.
Returning to Quarterly Payments
Looking ahead past this awful tax year, I do have actual reason to believe that next time will be better. For one, we won’t have the ACA repayment to worry about. Additionally, my wife’s 1099 income should be lower now that she’s transitioned fully to her main, tax withholding job.
But that’s not enough, is it? That’s why I really do intend to get back to sending in my quarterly payment. I obviously used to do this when I was fully self-employed but got out of the habit once moving into W2 work. It now seems very clear that I shouldn’t have done that — which is why I’ve ended up in this mess.
For as much as I write about money and managing my finances, it seems that I can still be very much surprised. In short, this Tax Day absolutely sucks for me — and, even as I write this in the afternoon of April 15th, I’m not even sure of what my next move will be. Nevertheless, I am thankful to have options, as without some of the fallbacks we already have in place, things could be a lot worse.
That said, please learn from my mistakes by keeping an eye on your tax withholdings, setting money aside from any 1099 work you do, and starting your taxes earlier so that you have more time to strategize! I only wish I’d taken my own advice here — so maybe next year.
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