I went through this exact same situation when I got my first big promotion in California! That 39% total deduction rate is completely normal for your income bracket here, especially with bonus/backpay included in the check. What's happening is your payroll system is treating this $5,200 as your new monthly norm and calculating withholding as if you'll make ~$62k annually. Since this included one-time payments, you're probably being over-withheld for your actual annual income. Here's what I'd recommend: - Wait to see your next regular paycheck (without bonus/backpay) before panicking - Use the IRS Tax Withholding Estimator mid-year to check if you're on track - Remember that your 401k (6%) and health insurance aren't "lost" money - they're investments in your future The breakdown is likely: ~22% federal, ~9% CA state, 7.65% FICA, plus your 6% 401k and health premiums. California doesn't mess around with state taxes, unfortunately! Congrats on the promotion after 2 years of hard work! The financial adjustment period is tough but you'll settle into the new income level soon.

I feel your pain! I had almost the exact same experience when I got promoted last year - went from around $3,800/month to $5,100 one month and nearly had a heart attack when I saw the withholding. The 39% you're seeing is definitely normal for California at your income level, especially with bonus/backpay mixed in. Your payroll system is basically calculating as if you'll make $62,400 annually ($5,200 x 12), which pushes you into higher tax brackets temporarily. Here's what helped me get through it: I tracked my actual year-to-date withholding against what I would really owe using a simple spreadsheet. Turns out I was being over-withheld by about $200/month because most of my paychecks were actually lower than that one big promotion check. Don't panic and change your W-4 immediately - wait to see what your regular paychecks look like first. The system will balance out over the year. And hey, congrats on finally getting that promotion you worked so hard for! The financial adjustment is temporary but the career advancement is permanent.

Just want to add one more important point that I learned the hard way - make sure you file your return by tomorrow's deadline even if you can't pay! The failure-to-file penalty is 5% per month (up to 25% total) while the failure-to-pay penalty is only 0.5% per month. That's a huge difference on $20k. I made the mistake of not filing on time a few years ago because I couldn't pay, and it cost me an extra $5,000 in penalties. The IRS is actually pretty reasonable about payment plans if you file on time and communicate with them. They'd much rather work with you than chase you down later. Also, once you set up the payment plan, make sure you never miss a payment or they can default the entire agreement. Set up autopay if possible to avoid any accidents. Good luck!

I just went through this exact situation last month with a similar amount owed. One thing that really helped me was calling the IRS Practitioner Priority Service line (1-866-860-4259) instead of the regular taxpayer line. As long as you have a power of attorney form or are calling about your own account, they typically have much shorter wait times - I got through in about 20 minutes. The agent walked me through all my options and helped me understand that with a $20k balance, I could actually qualify for a "guaranteed" installment agreement since it's under $50k and I was current on filings. They also explained that if I could somehow pay it off within 120 days, there would be no setup fee at all and minimal interest accrual. Another tip: if you're self-employed or have irregular income, ask about a different payment structure. They can sometimes work with seasonal income patterns or allow lower payments during slower months. The key is being upfront about your financial situation when you call.

The LLC structure won't help you bypass the passive activity loss limitations since the IRS focuses on the substance of the activity, not the entity form. However, there are a few other strategies worth exploring for your situation. Since you're already maximizing depreciation on the rental portion and plan to pass the property to your kids, consider whether the current tax benefits outweigh the depreciation recapture you'd face if you ever sold. The stepped-up basis strategy you mentioned is solid for estate planning. One often overlooked opportunity is ensuring you're capturing all allowable expenses for the rental portion - home office deductions if you use part of your space for rental management, travel expenses to purchase supplies, etc. Also, make sure you're properly allocating utilities, maintenance, and insurance between personal and rental use. Given your income level, you might also want to explore whether either you or your spouse could qualify as a real estate professional by documenting time spent on rental activities. Even if it's just property management, maintenance coordination, and tenant screening, those hours can add up. The 750-hour threshold is more achievable than many people think when you properly track all real estate-related activities.

I've been following this thread with great interest as I'm in a very similar situation - primary residence with rental income that exceeds the passive loss limitations. One strategy that hasn't been mentioned yet is potentially converting your current setup into a legitimate boarding house or bed & breakfast operation. If you can document that you're providing substantial services to your tenants (daily cleaning, meals, utilities management, etc.), the rental income might be reclassified as active business income rather than passive rental income. This would allow you to deduct losses against your other income regardless of the $150k threshold. The key is that you need to provide services that go beyond what a typical landlord provides. Things like furnished rooms with daily housekeeping, shared common areas you actively maintain, or meal preparation can help establish this as an active business rather than passive rental activity. Obviously this changes the nature of your living arrangement significantly, and you'd need to check local zoning laws and HOA restrictions. But for the right situation, it could be a way to legitimately convert passive losses into active business deductions while keeping the property in your name for the eventual stepped-up basis benefit you're planning for your children.

I'm curious about how the Employee Retention Credit was calculated by your first preparer. I know the rules around that were super strict - your business had to be fully or partially suspended due to government orders OR have a significant decline in gross receipts during specific quarters. Some preparers were claiming it for businesses that didn't actually qualify.

This is definitely not normal practice and honestly sounds like a huge red flag. Any reputable tax preparer should be transparent about your refund amount - that's YOUR money and YOUR tax information, after all. Given that you've already had one preparer disappear on you and now this second one is being evasive about communication AND withholding basic information about your return, I'd be very concerned about the quality of their work. The fact that they've been skeptical about the Employee Retention Credit from the start but won't show you how they've handled it is particularly worrying. I'd strongly recommend demanding to see the completed return before paying. You need to verify that the ERC calculation is legitimate and that all other aspects of your return are accurate. If they refuse, that tells you everything you need to know about their professionalism. You might be better off cutting your losses and finding a third preparer who will actually be transparent with you about your own tax return. Remember, you're the one who has to sign that return under penalty of perjury - you have every right to review what you're putting your name on before paying for the service.

I've been dealing with this exact question for my LLC and wanted to share what I discovered after diving deep into the regulations. The IRS Publication 970 actually has some helpful guidance on this, though it's buried in dense language. The critical test is whether the education "maintains or improves skills needed in your present work, business, or profession" OR "meets the express requirements of your employer or the requirements of law or regulations for keeping your present salary, status, or job." College degree programs rarely meet this test because they're viewed as qualifying you for new opportunities rather than just maintaining current skills. However, I found a potential workaround that might apply to your situation. If your contract work requires specific technical skills and you can demonstrate that particular courses directly enhance those exact skills (not just related skills), you might have a case for deducting those individual course costs. The key is being very granular - not "college helps my business" but "this specific database management course improved the exact services I provide to my current client." One thing to be aware of: even if some courses qualify as business expenses, you can't also claim education credits for those same expenses on your personal return. You have to choose one or the other for each dollar spent. Given your numbers ($42K business income, $18.5K tuition), I'd definitely run the math on education credits vs. business deductions to see which provides better overall tax savings. The credits might actually be more valuable since they reduce your tax liability dollar-for-dollar rather than just reducing taxable income.

Based on everyone's discussion here, I think the key takeaway is that this really comes down to proper documentation and being very specific about which courses directly improve your existing business skills versus which ones are more general education. From what I'm reading, it sounds like @LunarEclipse might have better luck focusing on individual courses that directly enhance the specific services they're already providing to their contract client, rather than trying to deduct the entire degree program. The "maintains or improves existing skills" test seems pretty strict. I'd also echo what others have said about exploring the education credits - with $42K in business income, those credits could potentially provide more tax savings than business deductions anyway, especially since credits reduce your actual tax liability rather than just your taxable income. One thing I didn't see mentioned is that you might want to consider timing. If some of your courses clearly qualify as business expenses and others don't, you could potentially optimize by taking the most business-relevant courses in years when you have higher business income (making the deductions more valuable) and saving the more general courses for years when the education credits would be more beneficial. Definitely talk to your accountant about running the numbers both ways - business deductions versus education credits - to see which approach maximizes your overall tax savings.