Thanks for this! My LLC was never a C-Corp so I don't think I have accumulated E&P to worry about. But I'm curious - what counts as passive income in this context? The partnership I own is an active business that I don't personally manage, so I'm getting K-1 income but not actively participating. Is that considered passive?

Since your LLC was never a C-Corp, you're correct that you don't need to worry about the excess net passive income tax. That's a relief! Regarding what counts as passive income - for this specific tax concern, the IRS has a particular definition of passive investment income that includes rents, royalties, dividends, interest, and annuities. Income from a partnership where you don't materially participate would typically be considered passive for passive activity loss rules, but that's different from the S-Corp passive investment income test. Your partnership income would likely be characterized based on the nature of the income itself (business income, rental income, etc.).

This is super important! I missed this when I was in a similar situation and ended up taking distributions that exceeded my basis. Had to report them as capital gains and paid a lot more tax than necessary. Tracking basis correctly is critical with multi-entity structures.

Thanks for pointing this out! I hadn't even thought about how this would impact my basis calculations. Are there any specific tracking methods you'd recommend? My accountant hasn't mentioned anything about basis adjustments.

Is it possible to deliberately seek debt cancellation as a strategy? I have clients asking about this as if it's a financial hack.

You can strategically settle debts for less than you owe, knowing you'll get a 1099-C, but it's not the "free money" hack people think it is. Here's why: First, you'll pay income tax on the forgiven amount - often 22-24% for most people. Second, your credit score takes a massive hit that can last 7+ years, affecting everything from mortgage rates to insurance premiums. Third, you generally need to be significantly behind on payments before creditors will settle, which means months or years of collection calls, potential lawsuits, and stress. Some clients come in thinking debt settlement is a clever financial strategy, but for most people, the long-term costs outweigh the benefits. The clients who come out ahead usually had legitimate hardships and no real ability to pay the original debt, so the tax hit is better than bankruptcy.

Would the Qualified Principal Residence Indebtedness exclusion apply to business debts like that? Or just primary residence mortgages?

Do you have any recommendations for keeping track of all these different sources? I'm a new CPA and finding it overwhelming to organize everything.

I use a combination of methods. For larger clients with recurring issues, I maintain dedicated folders organized by topic rather than by client, which helps when similar issues come up with different clients. I also keep a personal knowledge base with notes on important rulings and interpretations. For research organization, I've found that creating summary documents with hyperlinks to primary sources works better than trying to save everything. Focus on understanding the principles and knowing where to find the details when you need them, rather than memorizing everything.

State tax compliance is the bane of my existence! Do you use any specific tools for state tax research?

Thanks for bringing this up! I had no idea about the itemizing rule. Does this mean we need to coordinate our filing strategies even if we're doing separate returns? That seems frustrating.

Yes, you do need to coordinate at least on this one aspect. If your ex decides to itemize their deductions, you'll be forced to itemize as well, even if your itemized deductions are less than the standard deduction. This can result in you paying more tax than if you both took the standard deduction. It's one of the downsides of the Married Filing Separately status. That's why it's worth having a brief conversation with your ex about whether either of you plans to itemize, just so you're not caught off guard.

No, you can't claim Head of Household if you're married as of December 31st. You would need to be "considered unmarried" which means either legally separated under a decree or legally divorced. Plus you need a qualifying dependent and to have paid more than half the cost of keeping up your home.

Omg I didn't even think about the insurance subsidies! Do you know if there's a limit to how much they can make you repay for those? I've been getting pretty substantial subsidies since my individual income is low...

There are repayment limitations based on your household income as a percentage of the federal poverty level. For most people, the maximum repayment amount ranges from $325 to $2,700 per year depending on income level. However, if the amended return pushes your household income above 400% of the federal poverty level, there is no repayment cap - you'd have to repay ALL subsidies received. This threshold is what really hurt in my situation.

This is so confusing! I thought if you paid your own tuition you always claim your own education credits regardless of dependency status? My parents claimed me but I still claimed my own American Opportunity Credit last year.

Thanks for the tip about the Interactive Tax Assistant! I'm definitely going to check that out before making any decisions. I didn't realize grandma could claim the education credits if she claims me - that could be a significant benefit since I have about $12,000 in tuition expenses each year.