Just wondering - are you using a tax software for this complicated situation or hiring a CPA? I've got similar mixed income and I'm not sure if something like TurboTax can handle it correctly.

I'm in a very similar situation - $125K W2 and about $15K in 1099 consulting income. One thing I learned the hard way is to track EVERYTHING for business expenses from day one. I missed out on so many deductions my first year because I wasn't organized. For your situation, definitely keep receipts for any equipment, software subscriptions, internet percentage, phone bills, mileage to any client meetings, and even things like professional books or courses related to your consulting. The home office deduction can be significant too if you have a dedicated space. Also, consider opening a separate business checking account for your gig income and expenses. It makes tracking so much easier come tax time and looks more professional if you ever get audited. I use a simple spreadsheet to track monthly income and expenses by category - takes maybe 10 minutes a month but saves hours during tax season. The extra income is definitely worth it even with the tax hit. Just stay organized and make those quarterly payments!

I think you might be able to claim a per diem instead of tracking actual expenses. When I did contract work in another state, my accountant had me use the GSA per diem rates (Google "GSA per diem") for that location. The benefit is you don't need to keep meal receipts, and it covers incidental expenses too. It's a fixed amount based on the location's cost of living.

Just wanted to add another perspective as someone who's been through multiple temporary work assignments. One thing that often gets overlooked is keeping detailed records of everything, even if you're not sure it's deductible. I use a simple spreadsheet to track all my expenses with dates, amounts, and descriptions. Even though groceries aren't deductible, having good documentation of your hotel costs, transportation, and restaurant meals will make tax time much easier. The IRS loves documentation, and if you ever get audited, having organized records will save you a lot of headaches. Also, don't forget about any professional development expenses during your internship - things like professional association memberships, work-related books, or industry conferences might be deductible even if your regular living expenses aren't. Your internship sounds like it's in a legitimate temporary work situation, so you should be able to claim the allowable deductions as long as you keep good records.

Question about contribution limits - does the Code D amount still matter for checking if you've exceeded the annual limit? I'm trying to max out my 401k and want to make sure I'm counting it right for next year.

This is a great question and you're absolutely right to double-check! As someone who's dealt with similar timing issues, I can confirm that your payroll department is handling this correctly. The Code D box on your W-2 should reflect what was actually deducted from your paychecks during 2024, regardless of when your 401k administrator received and processed those funds. This timing discrepancy is especially common with December contributions - your employer withholds the money before year-end, but the 401k company might not process it until early January. For tax purposes, what matters is when the deduction reduced your taxable income (i.e., when it came out of your paycheck), not when it hit your retirement account. Since you're under the contribution limit and the numbers add up based on your paycheck deductions, you're all set. Use the W-2 Code D amount for your tax filing and don't worry about the difference with your 401k administrator's records - that's purely a timing issue that won't affect your taxes at all.

i had the same issue last month and tried searching all over youtube and reddit to understand what was happening. after days of research and confusion I tried taxr.ai and it gave me a whole breakdown of what was happening with explanations for all the codes. saved me soooo much time and stress.

Don't panic! I went through the exact same thing last year and those codes had me stressed for weeks. Code 570 just means they put a temporary hold on your refund while they review something - it's actually pretty common, especially if you claimed EIC or child tax credits like you mentioned. The 971 code means they're sending you a notice explaining what they're reviewing. Since you don't see a TC 898 code (which would indicate an offset), they're most likely not taking your whole refund. They're probably just verifying your income or checking some calculations. I ended up getting my full refund about 3 weeks after those codes appeared on my transcript. My advice: wait for the letter they're sending you before calling. It'll explain exactly what they need or what adjustment they're making. If you don't get anything in 2-3 weeks, then definitely call the Treasury Offset Program number someone mentioned earlier to rule out any debts, and if that's clear, try to get through to an IRS agent. But honestly, with EIC and child tax credits, these delays are super normal even though they're stressful as hell!

Something I haven't seen mentioned yet is that you should check if your state has any maximum contribution limits for 529 plans. Most states have aggregate contribution limits between $300k-$500k per beneficiary. Also, think about who should own the 529 accounts. If grandparents own them, the distributions don't count as income to the student on the FAFSA. But if you own them, they're considered parental assets which have less impact on financial aid than student assets.

Given your substantial windfall and complex situation, I'd recommend a multi-pronged approach rather than putting all your tax optimization eggs in the 529 basket. Since 529 contributions don't reduce federal capital gains taxes (as mentioned earlier), consider these additional strategies: 1. **Installment sale structure** - If possible, restructure part of the business sale as an installment sale to spread the capital gains over multiple years, potentially keeping you in lower tax brackets. 2. **Charitable remainder trust** - If you're charitably inclined, this could provide immediate tax deductions while generating income for retirement. 3. **Opportunity Zone investments** - Depending on timing, rolling some gains into Opportunity Zone funds could defer and potentially reduce capital gains taxes. 4. **State tax planning** - Some states have no capital gains tax. Depending on your residency situation around the sale, this could be significant. For the 529s specifically, I'd suggest contributing enough to maximize any state tax deductions you're eligible for, but don't over-contribute given your kids' ages and remaining education costs. Your sophomore and younger two would benefit most from the tax-free growth. With 20 years until retirement and another liquidity event expected in 4-6 years, you have flexibility to optimize across multiple tax years rather than trying to minimize everything in this single year.