Make sure you use the right dependent code on your tax return! Many tax software programs will ask if the dependent is your "qualifying child" or "qualifying relative" - your grandmother would be a qualifying relative. Using the wrong code could trigger unnecessary reviews.

Just to add some reassurance - I work in tax preparation and see this situation frequently. The IRS audit from last year has absolutely zero impact on your ability to claim your grandmother as a dependent for 2024. Each tax year is evaluated independently. Based on what you've described, your grandmother should qualify as your dependent under the qualifying relative rules. Her Social Security income of $14,500 is likely mostly non-taxable (especially if it's her only income), which means her gross income for dependency purposes is probably well under the $5,050 threshold for 2024. The key thing is documenting your support. Since you're paying $1,800-2,000 monthly for her expenses, that's $21,600-24,000 annually - far more than her $14,500 Social Security income. Keep receipts for housing, utilities, food, medical expenses, and anything else you pay for her. One tip: calculate the exact support test by adding up ALL sources of her support (what you pay + what she pays from her own income), then make sure your contribution exceeds 50% of that total. Given your numbers, you should easily pass this test.

Has anyone used TurboTax for calculating these education credits? I'm trying to figure out if it automatically optimizes how scholarships are allocated or if I need to manually figure it out first and then enter it that way.

For anyone still confused about the allocation flexibility, here's a practical example that might help clarify things. Let's say you have $10,000 in scholarships and $15,000 in total college expenses broken down as: $8,000 tuition, $3,000 room/board, $2,000 books, and $2,000 personal expenses. Since only tuition and books ($10,000 total) are qualified expenses for AOTC, you could allocate your $10,000 scholarship to cover the $3,000 room/board + $2,000 personal expenses + $5,000 of tuition. This leaves you with $3,000 of tuition + $2,000 books = $5,000 in qualified expenses that you paid out-of-pocket, which you can then use for your AOTC calculation. The key insight is that you get to choose how to allocate unrestricted financial aid, and it's usually best to apply it to non-qualified expenses first to maximize your tax credits. Just remember that any scholarship money used for non-qualified expenses (like room/board) becomes taxable income to you - but for most students, the tax benefit from a larger education credit outweighs this.

Just wondering - has anyone tried using other tax software instead of TurboTax for handling inherited IRAs? I've been having similar issues and thinking about switching to H&R Block or FreeTaxUSA.

I had the exact same TurboTax error last year with my inherited IRA situation! The key thing that fixed it for me was making sure I selected "inherited IRA" as the account type rather than just "traditional IRA" when entering the distribution. In TurboTax, when you get to the section about retirement distributions, look for a dropdown that asks about the type of IRA account. There should be an option specifically for "inherited IRA" or "beneficiary IRA." Once I selected that option, it automatically knew to use distribution code 4 and didn't try to apply the early withdrawal penalty. Also, regarding your $6,500 traditional IRA contribution - since you're above the income limits for deducting it, make sure you check the box that says "this is a non-deductible contribution" when entering it. This will trigger TurboTax to include Form 8606 in your filing, which is required for non-deductible contributions. Try entering the inherited IRA distribution first with the correct account type, then add your traditional IRA contribution as non-deductible. That order worked for me when nothing else did!

Kinda off topic but I bought a Rolex last year and it has appreciated nearly 15% already lol. Didn't get any tax deduction when buying it though. Honestly just buy it if you want it and can afford it - the tax angle is a dead end unless you genuinely run a luxury watch business or something similar.

Your buddy is unfortunately misinformed about the Rolex charity angle. While it's true that the Hans Wilsdorf Foundation (which owns Rolex) is structured as a charitable foundation in Switzerland, that doesn't make your purchase of a Rolex watch a charitable donation. You're buying a product from a for-profit retailer, not making a direct donation to the foundation. The IRS is very clear that personal luxury items like watches are not deductible unless they meet very specific business requirements. Even then, a $14,000 Rolex would be hard to justify as "ordinary and necessary" for most businesses when a $50 Timex serves the same function. My advice? Buy the watch if you love it and can afford it, but don't count on any tax benefits. Keep it simple and enjoy your purchase without trying to game the tax system - that's a recipe for trouble down the road.

Called them yesterday and got hung up on twice lololol Michigan's customer service is a joke

I'm in the exact same situation - filed 2/8 and still stuck on "processing" with no updates. Been calling every few days but can never get through. At least now I know it's not just me dealing with this mess. Really hoping we all see some movement soon!