Had the exact same issue. The worksheet you need is called the "State and Local Income Tax Refund Worksheet" in the 1040 instructions. BUT if you used tax software last year, you could just look at Schedule A, line 5e from your 2024 return to see exactly how much state tax was actually deducted. The rule is pretty simple: only pay tax on refund $ for which you actually received a federal tax benefit.

This is such a common confusion! I went through the exact same thing last year. The key insight that finally clicked for me is that you only report as taxable income the portion of your state refund that corresponds to taxes you actually got a federal deduction for. Since you hit what sounds like the SALT cap and only deducted $650 of your $6,200 in state taxes, you'd calculate: ($650 ÷ $6,200) × [your refund amount] = taxable portion. So if your state refund is, say, $1,500, you'd only report about $157 as taxable income ($650/$6,200 = 10.5%, so $1,500 × 10.5% = $157). The IRS has a specific worksheet for this calculation in the Form 1040 instructions - look for the "State and Local Income Tax Refund Worksheet." It walks you through the exact calculation using your specific numbers. Don't let your tax software intimidate you into reporting the full refund amount if you didn't get the full deduction benefit!

When I got married, we both kept our W4s at "single" rate for the first year just to be safe. Yes, we overwitheld and got a big refund, but I'd rather get a refund than owe! In your situation with two decent incomes, definitely check that box 2c at minimum.

I went through this exact same thing when I got married two years ago! That jump in take-home pay is totally normal but can be scary. Here's what worked for me: First, don't panic - you're not going to owe a "giant" tax bill, but you'll probably owe something if you don't adjust. With your combined income of around $128k, you're likely hitting higher tax brackets together than the withholding tables account for. I'd strongly recommend using the IRS Tax Withholding Estimator (it's free on irs.gov) rather than just checking box 2(c). Yes, it's a bit tedious, but it gave me much more accurate results. You'll need both of your recent pay stubs and last year's tax returns. The estimator will tell you exactly how much extra to withhold on line 4(c) of your W4, or whether checking box 2(c) is sufficient. In my case, we needed an extra $85 per paycheck withheld beyond what box 2(c) would have done. Also, since you just changed this a few weeks ago, you have time to adjust if needed. Better to spend 30 minutes with the calculator now than get surprised next April!

20 Just want to point out that everyone seems to be assuming tax rates won't change much. But look at the national debt... over $31 trillion! Tax rates in the 1970s were WAY higher than today. Top marginal rate was like 70% at one point! I'm putting everything in Roth accounts even though I'm in the 32% bracket now. I'd rather pay 32% today than risk 50%+ rates when I retire in 30 years. The government's gotta pay that debt somehow, and I'm betting it'll be through higher taxes, not spending cuts.

Great discussion everyone! As someone who switched from Roth to Traditional 401(k) after getting promoted to a higher tax bracket, I can share my experience. The math really does work out for Traditional when you're in those higher brackets. I was initially hesitant because like the OP, I was worried about future tax rates. But here's what convinced me: even if tax rates increase across the board, I'm still likely to be in a lower bracket in retirement than my current 35% marginal rate. My financial advisor helped me run the numbers - if I max out my Traditional 401(k) at $22,500, I save about $7,875 in taxes immediately. That's money I can invest in a taxable brokerage account right now. Even accounting for capital gains tax on that separate investment, the Traditional route comes out ahead in most realistic scenarios. The key insight was realizing that in retirement, I won't need my full current income. No more mortgage payments, kids will be independent, and I won't be saving 20%+ of my income for retirement anymore. So even with some tax rate increases, my effective rate in retirement should be lower than today's marginal rate. That said, I do put some money in a Roth IRA for diversification, but the bulk goes Traditional 401(k) for the immediate tax arbitrage opportunity.

Just wanted to add one more consideration that might be relevant for your situation - the timing of when you actually made the loan during the tax year can matter. If you made the loan partway through the year, you'll need to determine your at-risk amount as of the end of the tax year, not when you first made the loan. Also, since you mentioned this is only your third year and you're not expecting profits until year five, make sure you're tracking your basis adjustments year over year. Each year's losses will reduce your outside basis, and you'll need to maintain detailed records to properly calculate your basis for future years when the partnership hopefully becomes profitable. One last thing - if your partnership has any nonrecourse debt (debt where partners aren't personally liable), that gets allocated differently and won't increase your at-risk amount the same way your direct loan does. Just something to keep in mind as your business grows and potentially takes on additional financing.

Great discussion everyone! As someone who's navigated similar partnership tax issues, I want to emphasize a few key points that might help clarify things for Grace and others in similar situations. First, the distinction between "outside basis" and "at-risk" amounts is crucial but often confusing. Think of it this way: your outside basis is like your "investment account balance" in the partnership (starts with capital contributions, adjusted for income/losses/distributions). Your at-risk amount is what determines how much loss you can actually deduct (includes capital contributions PLUS loans you've made to the partnership where you're personally liable). For Grace's situation: the loan to your partnership won't increase your outside basis, but it absolutely increases your at-risk amount, which should allow you to deduct losses that exceed your remaining outside basis. One practical tip I learned the hard way - keep a simple Excel tracker with separate columns for: (1) Outside Basis, (2) At-Risk Amount, and (3) any suspended losses. Update it every year after getting your K-1. This saved me countless hours when I eventually had to provide documentation during an IRS examination. Also, since you mentioned formal loan documents with interest rates - that's excellent! Just make sure the partnership is actually making those interest payments on schedule and reporting them properly. The IRS looks for substance over form, so the more your arrangement behaves like a real third-party loan, the better.

I found this confusing too until my accountant explained it. Here's a simplified example: Let's say you have: - $70,000 in wages - $8,000 in long-term capital gains Your total income is $78,000, but the tax calculation happens like this: 1. Your $70,000 wages are taxed using regular tax brackets 2. The $8,000 LTCG is taxed at the capital gains rate (0%, 15%, or 20%) 3. These separate tax amounts are added together for your final tax bill It's almost like having two separate tax returns that get combined at the very end!

This is exactly the kind of confusion I had when I first started dealing with multiple income sources! The best way I've found to think about it is that the IRS essentially runs multiple "mini tax calculations" simultaneously. Your Form 1040 is like the final summary sheet, but behind the scenes there are all these supporting forms and schedules doing the heavy lifting: - Schedule B for interest and dividend income - Schedule D and Form 8949 for capital gains/losses - Schedule C for self-employment income - Form 4797 for certain business asset sales Each of these feeds their own tax calculation into the main 1040, where everything gets totaled up. So even though your AGI shows one combined number, the actual tax computation preserves the different treatment for each income type. It's kind of like how a restaurant bill might show one total at the bottom, but the kitchen prepared your appetizer, main course, and dessert separately with different cooking methods. The final bill combines everything, but each item was handled according to its own "recipe" behind the scenes.