People get hit with unexpected tax bills all the time. Any scheme of property taxes will generate taxes on illiquid assets. So will municipal user fees (sewer, water). So will I come taxes for people likes tipped employees.
No one ever went bankrupt from income tax. Property taxes don't suddenly jump an order of magnitude. An unexpected user fee is almost always a rare event like a broken water pipe or a bad meter and can often be negotiated with the utility.
People have absolutely gone bankrupt from income tax. Let's say you receive a large amount of income in the form of an asset which is suddenly devalued before you sell it. You owe income tax on the original value you received. But the stock is now worthless, so you have nothing you can sell to pay your income tax.
This used to happen with ISOs during the dot-com bust. It can still happen with other volatile instruments, like cryptocurrency.
You're right, but that's pretty exceptional and I feel like something you really ought to know is a potential scenario. (I was aware of it at least as someone with stock options throughout 1999-2013.) This is different in kind than a medical expense which can happen to anyone randomly and bankrupt even those who thought they were insured against it.
I think I have very good medical insurance through my employer and I'm still terrified an unforeseen medical expense will somehow bankrupt me.
People don’t declare bankruptcy for tax debt largely because federal taxes aren’t dischargeable in bankruptcy. But tons of people lose, for example, their homes due to tax related financial problems.
This seems a bit of a false equivalency:
If you get an "unexpected tax bill" due to a change in your liquid assets for a sum that exceeds several times your gross worth like some of these medical bills, then you are doing some really shady tax reporting..
I think it goes like this. I get a huge medical bill - say, $50,000. What can I do to pay it? What assets do I have? Well, I've got $1,000 in the checking account. That isn't going to cut it. Ah, but I've got $60,000 in my IRA, and the rules say I can tap it in this situation (IIRC). Well, goodbye retirement, but at least I can pay off my medical bill now.
Unfortunately, that $50,000 I took from the IRA counts as income, so my income this year is $50,000 higher than my withholding. Behold, a rather large unexpected tax bill. Nothing shady required.
If my memory is wrong, if you can't take it out of an IRA for emergency medical expenses, then replace "IRA" with "stock I bought two decades ago for much less than it's currently worth". Same result.
