Can someone please explain the difference between the American Opportunity Credit and the Lifetime Learning Credit on Form 8863? I have two kids in college and I'm not sure which one to use for each of them.

Actually, I want to clarify something important about your original calculation. The computer expense might not qualify depending on the specifics. For the American Opportunity Credit, computers and software only count as qualified expenses if they're required for enrollment or attendance by ALL students in the course of study - not just helpful or recommended. If the computer was just something you bought to help her with schoolwork but wasn't specifically required by the school, then your calculation would be: $7,500 (tuition) - $3,250 (scholarship) = $4,250 in qualified expenses. Also, make sure to check if any portion of that merit scholarship was designated for specific non-qualified expenses like room and board. If the scholarship terms allow flexibility in how it's used, you might be able to allocate some of it to living expenses (making that portion taxable to your daughter) while preserving more tuition expenses for the education credit. This strategy often results in a better overall tax outcome, especially if your daughter has minimal other income. I'd recommend reviewing the scholarship award letter and your daughter's 1098-T form carefully to see exactly what options you have for optimizing this calculation on Form 8863.

Don't stress too much about the audit risk. The IRS expects new businesses to have losses in the beginning. I've had losses for my pottery business for 2 years and finally turned a profit in year 3. Never got audited. Just make sure your expenses are actually business-related and reasonable. Like don't try claiming a full spa day for yourself as "research" lol. That's the kind of thing that raises flags.

Great question! I'm also a service-based business owner (freelance graphic design) and went through this exact same situation in my first year. You definitely need to file Schedule C even with a loss - but like others mentioned, that loss actually works in your favor by reducing your overall tax burden from your W-2 income. One thing I learned the hard way is to make sure you're categorizing your startup costs correctly. Some of those certification courses and equipment purchases might need to be depreciated over multiple years rather than fully deducted in year one, depending on the amounts. The IRS has specific rules about startup expenses over $5,000. Also, since you're doing both employee work and self-employment, you'll still owe self-employment tax on your $11,400 of business income (even though you had a net loss after expenses). It's about 15.3% on that income, but you can deduct half of that SE tax as an adjustment to income. Keep those detailed records you mentioned - they're your best protection. The "hobby loss rule" only becomes an issue if you show losses for multiple consecutive years without demonstrating you're genuinely trying to make a profit. One year of losses is totally normal and expected for a new business!

Are we sure the gift tax exclusion is $18k for 2025? I thought it was still $17k? Not that it matters much for OP's $20k gift, they'd still need to file the form.

This is such a thoughtful way to help your child! One additional consideration I haven't seen mentioned yet - make sure to document the gift properly with a gift letter that includes the date, value, and your relationship to the recipient. This creates a paper trail that can be helpful if the IRS ever has questions. Also, since your child is 25, they're definitely old enough to handle their own tax reporting, but you might want to give them a heads up about keeping good records of the sale for their tax return. They'll need to know your original purchase price and date to calculate the capital gains correctly. The timing sounds perfect too - if they're planning to use this for a car purchase relatively soon, the stock won't be sitting in their account generating additional gains that could complicate things. Smart planning all around!

I went the EA route before pursuing my CPA and want to share a tip about the exam itself. The Prometric testing experience can be jarring if you're not prepared for it. They have strict security procedures - expect to empty your pockets, roll up sleeves, get wanded with a metal detector, and be under camera surveillance. You can't bring anything into the testing room except your ID, and they provide a small whiteboard or scratch paper. The computer interface for the SEE exam is also pretty dated - nothing fancy like the CPA exam software. Make sure you do the sample test on the Prometric site to get familiar with it. And lastly, don't underestimate Part 3 (Representation). Many people focus on the tax law parts (1 & 2) but neglect studying the procedural rules and representation practices which can be quite technical and specific.

Great question about becoming an EA! I actually just completed my enrollment last year and can share some practical insights from the process. One thing I'd add to the excellent advice already given is to consider your timeline carefully. Since you're in Houston, you might want to check out local tax firms that value the EA credential - many of the larger practices here really appreciate having EAs on staff for representation work. Regarding study materials, I used a combination of Gleim and the IRS's own Publication 17 and Circular 230. Don't overlook the free resources from the IRS website - they have sample questions and detailed content outlines for each part that are invaluable for focusing your studies. Also, once you pass and get enrolled, consider specializing in a particular area like international tax or estate planning. The EA credential opens doors, but having a specialty can really set you apart in a competitive market like Houston. Good luck with your studies! The EA is definitely worth pursuing alongside your CPA - they really do complement each other well in practice.

Has anyone used the annualized income method instead? I'm in a similar situation but my income is VERY uneven throughout the year, so paying equal installments seems like it would create cash flow problems for me.

I'm in a very similar boat - just started freelancing in March and was totally confused about estimated payments! Reading through all these responses has been super helpful. One thing I'd add is to make sure you're also setting aside money for self-employment tax (the additional 15.3% for Social Security and Medicare) on top of your regular income tax. That caught me off guard my first year since as a W-2 employee, half of that was paid by my employer. Also, don't forget that you can deduct half of the self-employment tax when calculating your adjusted gross income, which can help reduce your overall tax burden. It's not huge but every bit helps when you're navigating this for the first time! The safe harbor route definitely seems like the way to go for peace of mind, especially in your first year when you're still figuring out your income patterns.