This is exactly the situation I found myself in a few years ago! The key insight that saved me was understanding that S-Corp taxation is rigid - profits MUST flow through based on ownership percentages, period. You can't change that. However, you have flexibility in how you get compensated BEFORE those profits are calculated. Here's what worked for me: 1) **Salary adjustment**: Document your actual role and responsibilities, then research market rates for similar positions. If you're doing $50K worth of work but only getting paid $30K salary, increase it to market rate. This reduces company profits before the 98/2 split. 2) **Track your basis religiously**: Start now, even if you have to reconstruct it. Your basis increases by your K-1 income each year and decreases by distributions. Once it goes negative, all future distributions are capital gains until you build it back up. 3) **Consider the gift tax implications**: If you're taking distributions beyond your ownership percentage, your brother is essentially gifting you money. This might have gift tax consequences for him if the amounts are large. The harsh reality is there's no magic way to avoid this fundamental issue - either increase your ownership percentage, increase your salary to reflect your actual contribution, or accept that excess distributions will have tax consequences. Don't try to get too creative with the accounting - the IRS has seen every trick with S-Corps and family businesses. Keep it clean and defensible.

This thread has been incredibly helpful! I'm dealing with a similar situation in our family S-Corp where I'm a 15% owner but contribute much more labor than that percentage would suggest. One thing I learned from our tax attorney that might help: if you're genuinely performing services worth more than your current salary, the IRS actually WANTS you to pay reasonable compensation. They're more concerned about S-Corp owners who try to minimize salaries to avoid payroll taxes than those who pay market rates. We documented my role with job descriptions and used salary surveys from the Department of Labor and industry associations. When we increased my salary from $35K to $65K (which was actually conservative for my responsibilities), it reduced company profits by $30K before the ownership split, which was exactly what we needed. The key is having solid documentation showing the salary increase reflects actual market compensation for work performed, not just a tax strategy. We kept detailed records of hours worked, responsibilities, and comparable positions at similar companies. As for basis reconstruction - it's definitely worth doing even if you have to go back years. I had to reconstruct 8 years of basis calculations using old tax returns and bank records. It was tedious but revealed I had been unknowingly taking distributions that exceeded my basis for three years. Getting this cleaned up before an audit was invaluable. The biggest surprise was learning that my excess distributions should have been reported as capital gains on Schedule D all along. We had to file amended returns, but it actually resulted in lower total tax liability than the way we had been handling it.

I had the exact same issue last year! I used H&R Block, uploaded Form 8332 for my daughter, and was told they'd mail the 8453. Six months later, my ex got a letter from the IRS saying the dependency exemption was denied because they never received the form. When I went back to H&R Block, they admitted they "couldn't find any record" of mailing it. I ended up having to file an amended return and mail everything myself with certified mail. H&R Block did cover the fees for the amendment since it was their mistake, but it was a huge hassle. Definitely don't just trust that they're handling it!

This is such a frustrating situation that unfortunately happens more often than it should. I work as a tax compliance specialist and see this exact issue regularly. Here's what you need to know: 1. **Immediate action needed**: Don't wait any longer. Contact H&R Block's office manager (not just any employee) and demand written confirmation that your Form 8453 with attached Form 8332 was mailed, including the date and IRS processing center address. 2. **If they can't provide proof**: Mail the forms yourself immediately with certified mail. You can still submit Form 8332 even after the original return was filed - just include a cover letter explaining the situation. 3. **Timeline matters**: The IRS typically processes these within 6-8 weeks once received. If your ex filed claiming the dependency exemption without the supporting form, his return might be in "pending" status or he could receive a notice requesting the documentation. 4. **Protect yourself**: Going forward, always request a copy of Form 8453 and tracking confirmation for any mailed documents. Many preparers are supposed to provide this automatically but don't always follow through. The good news is this can still be fixed, but time is critical. Don't let H&R Block's confusion delay your action any further.

Just to add some additional information that might be helpful: if you're concerned about the offset amount, you can request an offset trace by calling the Treasury Offset Program at 1-800-304-3107. They can tell you exactly how much will be taken and for what debt. I was so frustrated when this happened to me last year! Also, if you filed jointly and the student loan belongs only to your spouse, you might qualify for injured spouse relief (Form 8379) which could protect your portion of the refund from the offset. It's too late for this year since you've already filed, but something to consider for next year.

I went through this exact situation last year with my spouse's old student loan debt. Here's what actually happened in my case: The IRS processed our joint refund of $5,200. Republic Bank got their $2,000 advance payment first, then Treasury Offset took $2,800 for the student loans, and I received the remaining $400 via direct deposit to the same account I originally specified when filing. One thing that really helped was setting up an account on studentaid.gov to see the exact offset amount ahead of time. The Treasury Offset Program also sent a notice about 30 days before they actually took the money, which gave me time to mentally prepare for how much I'd actually receive. The whole process took about 3 weeks from when my return was accepted to when I got the final deposit. Republic Bank was actually pretty transparent about the timeline when I called them directly - they have a specific department that handles these offset situations since they're so common with tax advances. Just hang in there - the system works, it's just nerve-wracking when you're waiting and don't know exactly what to expect!

Be careful with the terminology here. In a C Corp, technically you don't take "draws" like you would in an LLC or partnership. You take either salary (through payroll) or dividends (distributions of profit). The IRS is very particular about C Corp owners taking reasonable compensation through payroll before taking dividends. This is because they want to collect those FICA taxes. If you try to bypass this by taking only dividends, they can reclassify those payments and hit you with penalties. Also, distributing invested capital back to shareholders is a whole different issue - that's actually a return of capital and has different tax implications than either salary or dividends. You should definitely talk to a CPA about this specific situation.

This is a great discussion and really highlights the complexity of C Corp compensation rules. I'm glad you updated your post to mention setting up proper payroll - that's absolutely the right approach. One additional point I'd add is that the IRS has specific guidelines for what constitutes "reasonable compensation" that go beyond just market rates. They look at factors like the company's financial condition, your role and responsibilities, time devoted to the business, and the company's dividend history. For pre-revenue startups, this often means you can justify below-market salaries, but you still need to document your reasoning. Also, regarding the investment capital distribution issue - it's worth noting that many investment agreements actually include provisions about founder compensation. Some investors expect founders to take reasonable salaries as part of the investment structure, while others prefer founders to have more "skin in the game" with lower compensation. Always check your investment docs before making these decisions. The key takeaway is that the IRS wants to see active shareholders receiving W-2 wages before taking any distributions. Even if it means higher payroll costs in the short term, it protects you from much bigger problems down the road.

One thing nobody's mentioned - check if your state offers income tax deductions or credits for 529 contributions! In our state, we get a deduction up to $10k annually for contributions to our state's 529 plan, which saves us about $700 in state taxes each year.

Great question! You're smart to think through the gift tax implications upfront. The key thing to understand is that for married couples filing jointly, you can absolutely contribute the full $34k from a single account (whether joint or individual) and still stay within the gift tax exemption limits. Here's what you need to know: Each spouse gets their own $17,000 annual exclusion per beneficiary, so together you can gift $34,000 to your son without triggering gift tax. The IRS doesn't care which specific account the money comes from - what matters is that you properly document the gift as coming from both spouses. If you fund the entire amount from one account, you'll need to file Form 709 (Gift Tax Return) to elect "gift splitting." This form tells the IRS that both you and your wife are treating the $34k as two separate $17k gifts, even though the money came from one source. Both spouses need to sign this form. The good news is there's no actual tax owed - you're just documenting that you're using both of your annual exclusions. This is a common scenario and the IRS handles it routinely.