Can you explain bracket creep more simply? I kinda get it but not really. Does this mean we should expect the same thing to happen for 2024 taxes?

Bracket creep happens when inflation pushes your income into higher tax brackets, even though your actual purchasing power hasn't increased. For example, if you made $100,000 in 2021 and $108,000 in 2022 (an 8% increase), you might think you're 8% richer. But if inflation was also 8%, your real purchasing power stayed the same - yet you might be paying taxes at a higher rate because you crossed into a higher bracket. For 2024, the brackets were adjusted by 7.1% for inflation, which is pretty substantial. This should help reduce bracket creep compared to 2022-2023. However, if your income grows faster than that adjustment, you could still experience some bracket creep effect. The key is to look at your effective tax rate (total tax divided by total income) rather than just the dollar amount to see if you're truly paying a higher percentage.

Absolutely this! My health insurance premiums jumped by almost 30% between 2021 and 2023. And while yes, we can deduct them, that deduction only helps on income tax, not self-employment tax. So we're still paying 15.3% SE tax on money that immediately goes out the door to health insurance.

Actually, I did start doing some consulting work on the side that brought in about $14k. I made quarterly estimated tax payments, but I'm wondering if I underestimated how much I needed to pay. How do you calculate the right amount for side income?

That side income is almost certainly a big contributor to your surprise tax bill! For side income, you generally need to pay: - Your regular income tax rate on the earnings (likely 22% or 24% at your income level) - Self-employment tax of 15.3% (this covers both employee and employer portions of Social Security and Medicare) So for $14k in consulting income, you'd need to set aside roughly 37-40% for taxes, which would be about $5,200 just from that side income. If your quarterly payments were significantly less than this, that could explain a big chunk of what you owe. Many people underestimate how much to set aside for self-employment income, especially the first year they have it. For next year, aim to set aside at least 35-40% of any consulting income for taxes, or use the IRS Form 1040-ES worksheet to calculate more precisely.

This happened to my spouse and me. Once I hit the Social Security cap around October, my paychecks got bigger but no additional tax was withheld to account for our combined income putting us in a higher bracket. It was like getting a raise but without proper tax withholding. Maybe check if that happened?

OMG you might be onto something with the reimbursements! I did have about $1,500 in travel expenses that they reimbursed me for when I had to fly to their headquarters for a big project. I didn't count those as income in my records because they were just covering my costs. Is that what's causing the discrepancy?

That's almost certainly the issue then! The $1,500 in reimbursed expenses plus your $7,830 in actual income equals $9,330, which is very close to the $9,450 they reported (the remaining $120 difference could be a calculation error or another small reimbursement you're forgetting). Reimbursed expenses should NOT be included on your 1099-NEC if they were legitimate business expenses. The client should issue a corrected 1099-NEC showing only the $7,830 in actual service income. If they included the reimbursements, they're reporting it incorrectly. Take this explanation to your client and specifically point out that expense reimbursements shouldn't be on the 1099-NEC. Many small businesses don't realize this and their accountants might not catch it if they're just given total payment figures.

You're right that reporting MORE income than what's on your 1099-NEC won't trigger IRS concerns - they're generally more worried about underreporting. However, for your own protection and record-keeping, it's still best to request a corrected 1099-NEC that accurately reflects what you were paid. The reason is that your client is likely taking a tax deduction for what they paid you. If their records show they paid you $2,000 more than what they reported on your 1099-NEC, that discrepancy could potentially cause problems for them in an audit, which could circle back to questions about your income.

Thanks for the advice! I'll reach out to them and request a corrected form. They've been pretty disorganized with their accounting (they're a startup) so I'm not surprised there was an error. Better to get everything aligned properly.

Thanks for the advice! I did save my confirmation numbers from all three payments. Do you think I should call them now or wait for the online system to update after my last payment processes?

I would wait at least 14 days after your last payment for the system to update completely. If you still see a discrepancy after that, then call them with all your confirmation numbers ready. Most of these timing issues resolve themselves within two weeks. The IRS is notorious for sending out notices that are already outdated by the time you receive them. The online account is generally more current than any paper notice.

That's not actually good advice. Electronic payments through Direct Pay give you an immediate confirmation number and are generally credited to your account much faster than checks. The benefit of the postmark date only matters if you're cutting it close to a deadline.

Thanks for this suggestion! Do you know if the Free File Fillable Forms are user-friendly for someone who doesn't have much experience with tax forms? I'm a bit worried I'll mess something up if I try to do it all manually.

The interface is definitely not as user-friendly as TurboTax. It's basically just the actual tax forms in electronic format with minimal guidance. There are some basic calculations built in, but it won't walk you through what to enter or provide explanations like commercial tax software does. If you're including something straightforward like a single 1099-G, it might be manageable. You'd essentially be copying most information from your original return and just adding the additional income. The key is to take your time and double-check everything. The IRS instructions for Form 1040-X are actually pretty detailed if you follow them carefully.

Wait, are you saying some unemployment benefits might not be taxable for 2023? I thought that was only a 2020 thing during the height of COVID. Can you provide more details on this announcement?