I actually know someone who got caught for tax evasion on illegal income. The issue wasn't just not reporting it, but the lifestyle mismatch. They had a minimum wage job but drove an expensive car and bought a house. IRS flagged it, started investigating, and that led to the criminal charges for the original illegal activity. So yeah, damned if you do (admit to illegal activity) and damned if you don't (get caught for tax evasion AND the original crime).

This is a fascinating legal paradox that highlights the complexity of tax law. The Fifth Amendment protects against self-incrimination, but the Supreme Court ruled in United States v. Sullivan (1927) that this doesn't exempt illegal income from taxation. The practical reality is that the IRS operates under strict confidentiality rules (IRC Section 6103), so they generally can't share your tax information with law enforcement without proper legal process. However, unexplained wealth discrepancies are what typically trigger investigations in the first place. If someone hypothetically had $135k in unreported income, the bigger risk isn't necessarily how you categorize it, but whether your reported lifestyle matches your claimed income sources. The IRS has become very sophisticated at detecting these mismatches through data analytics. The "illegal activities" checkbox exists primarily for legal compliance with Supreme Court rulings, not as a trap. But you're right that it creates an impossible situation - report honestly and potentially incriminate yourself, or misrepresent and risk fraud charges if discovered later. For anyone in genuinely complex income reporting situations, consulting a tax attorney who can provide privileged advice is usually the safest approach.

When I bought my house with seller financing last year, we structured it as an interest-only loan for 5 years with a balloon payment. This gave me lower monthly payments while I built up equity in another property I'm selling, and it gave the sellers predictable interest income without the tax complexity of receiving partial principal payments each year. Just make sure whatever you do is properly documented with correct amortization schedules and interest rates that are reasonable (too low and the IRS might impute interest). We used a real estate attorney to draft everything and it cost about $1200 but was worth every penny for the peace of mind.

One thing to keep in mind is that seller financing can also provide some negotiation leverage beyond just the tax benefits. Since the sellers are avoiding realtor commissions (typically 5-6% of the sale price), you might be able to negotiate a portion of those savings into a lower purchase price or better loan terms. Also, make sure you understand the due-on-sale clause implications if there's an existing mortgage on the property. If the sellers still owe money on the house, their lender could technically call the loan due when they sell, even with owner financing. Most lenders don't actively monitor this, but it's a risk worth discussing with your real estate attorney. The tax benefits you mentioned are real - the installment sale method can definitely help them manage their tax burden, especially if any of them are close to Medicare premium income thresholds. Just make sure everyone understands both the benefits and the additional paperwork requirements that come with seller financing.

Hey quick question - if my wife was unemployed most of year but did some freelance work making like $600 total, do we still need to report that? It was just cash for helping a friend with their website. No 1099 or anything.

I went through this exact situation two years ago when my husband was laid off in September. Here's what I learned that might help ease your stress: Filing jointly is definitely still the way to go - you'll get the full married filing jointly standard deduction and it's much simpler than filing separately. Your husband doesn't need any special paperwork proving he was unemployed. Just file your W-2 as normal and leave his income section blank. One thing to watch out for - if your husband received ANY unemployment benefits, even for a short period, he should have received a 1099-G form that you'll need to include. Those benefits are taxable income. Also, if he's been job searching, keep track of any job search expenses (resume services, travel for interviews, etc.) as some of those might be deductible. The reduced household income might actually work in your favor for certain credits like the Earned Income Credit if you have kids, or other income-based credits you might not have qualified for before when both of you were working. Don't stress too much about filing early - take your time to make sure you have everything right. The refund will come either way!

This is such a common confusion! I went through the exact same thing when I was in college. Here's what I learned after dealing with this situation: The key thing to understand is that your tax refund depends on how much tax was withheld from your paychecks versus your actual tax liability. Being claimed as a dependent affects your tax liability, but you'll still get back any excess withholding. With your $18,500 income, you'll likely still get a decent refund even as a dependent because you can take the full standard deduction ($13,850 for 2024). Your taxable income would only be about $4,650, putting you in the 10% bracket. The bigger picture is what others mentioned - your parents claiming you could unlock education credits worth thousands. I'd suggest sitting down with them to run the numbers both ways. When my family did this, we discovered that even though my refund dropped by about $700, my parents got back an extra $2,200 from the American Opportunity Credit. We ended up splitting the difference, so I actually came out ahead! Don't stress too much - there's usually a solution that works for everyone in the family.

This thread has been incredibly helpful! As someone who just went through this exact situation last year, I want to add one more perspective that might be useful. One thing that really helped me and my parents was creating a simple spreadsheet to track who paid what throughout the year. We listed tuition, room/board, books, personal expenses, etc. This made it crystal clear that my parents provided more than half my support, which removed any doubt about whether I qualified as their dependent. Also, don't forget about state taxes! The dependent status can affect your state return differently than federal. In my state, being claimed as a dependent meant I couldn't take a state-specific education deduction that was worth about $300. But my parents got a larger state credit that more than made up for it. The key is communication with your parents. Once we all understood the rules and ran the numbers together, the decision was obvious. Plus, having that conversation early in the year helped us plan better for the next tax season. We knew exactly who should pay which expenses to maximize our family's tax benefits. Your $18,500 income puts you in a good position - high enough that you'll get most withholdings back regardless, but not so high that dependent status creates major complications. You'll figure this out!

Has anyone used an accountant for this kind of situation? I'm thinking of bringing in a professional to help me document everything properly before I go to the bank. Seems like it might be worth the cost for peace of mind.

As someone who's been through a similar situation with cash from my handyman business, I'd recommend keeping it simple and straightforward. Don't overthink it - just make one deposit for the full amount. The bank will file their CTR for anything over $10k, but that's completely routine and not something to worry about. Before you go to the bank, gather up your tax returns from the years you earned this cash income. Having those handy shows you've been legitimate about reporting everything. You might also want to call ahead and let them know you're coming in with a large cash deposit - some banks appreciate the heads up. The key thing is you've already done the hard part by properly reporting and paying taxes on this income when you earned it. Now you're just moving money you own from your house to your bank account. Nothing suspicious about that!