Thanks for this clarification. I didn't realize there were specific criteria for claiming exempt status. Does the IRS actually enforce those penalties often? And what would be a better approach for my 2025 taxes if I still need to maximize my paychecks?

The IRS doesn't always enforce underpayment penalties, especially for moderate income levels, but they certainly can. The penalty is essentially interest on the amount you should have paid throughout the year. Your safest bet is to use the IRS Tax Withholding Estimator on their website to calculate the precise number of allowances or additional amounts to have withheld. For maximizing your paychecks while staying compliant, consider claiming a higher number of allowances on your W-4 (rather than exempt), or using the new W-4 form to specify a dollar amount of reduction in withholding. This lets you reduce withholding significantly without claiming an exemption you don't qualify for. Having at least some tax withheld also helps reduce the shock of a large tax bill at filing time.

The residency test isn't the only requirement. The relationship test matters too. OP didn't specify if this is their biological child, niece/nephew, or completely unrelated. Different rules apply depending on the relationship.

Thanks for this detailed information! I've definitely been adapting my business approach to become profitable. Did you handle the IRS correspondence yourself or did you need professional help?

I started handling it myself but ended up hiring a tax professional who specializes in small businesses when it became clear the IRS was seriously questioning my business classification. It was worth the investment because they knew exactly what documentation would be most persuasive. The most important thing was having contemporaneous records - meaning documentation created during the actual business operations, not reconstructed later. Regular business planning documents, marketing strategies, and detailed expense records created during those loss years were extremely valuable in demonstrating business intent.

I used TurboTax for 3 years of business losses and it didn't provide any special warnings about hobby loss rules. It just asked standard Schedule C questions. When I switched to a real accountant, she pointed out several red flags in how I'd been documenting my business that TurboTax never mentioned.

That's really helpful to know! I've been using TurboTax too but maybe I should consider getting professional help if I'm worried about the hobby loss rules. The software definitely doesn't seem to dig into the documentation aspects that everyone's mentioning here.

Do you know if this is true for all brokerages or just Robinhood? I have crypto on Coinbase too and I'm wondering if it's reported differently.

It varies by brokerage actually. Robinhood uses 1099-MISC for crypto, while some others use different forms. Coinbase usually sends a 1099-K if you had a high volume of transactions (over $20,000 and 200+ transactions), but they're moving toward more comprehensive reporting. The important thing to remember is that regardless of which form you get (or even if you don't get one), you're still required to report ALL crypto transactions to the IRS. Each purchase and sale needs to be treated as a property transaction with capital gains or losses calculated. The IRS has been cracking down on crypto reporting the last few years.

Yes, Robinhood does report wash sales on their 1099-B. Look for a code "W" next to any transactions - that indicates it was identified as a wash sale. The problem is they only identify wash sales within the same brokerage. If you sold on Robinhood and bought on Fidelity within 30 days, for example, it wouldn't be flagged, but it's still technically a wash sale that you're supposed to report.

I recommend FreeTaxUSA for beginners. It's much more straightforward than TurboTax and actually explains things in normal language. Federal filing is free and state is only like $15. I switched from TurboTax two years ago and it's so much easier to understand.

Did the IRS charge you a lot for the mistake? I'm worried about penalties if I screw something up.

16 What exactly is a "substitute for return"? That sounds scary. I've been ignoring mail that looks like it's from the IRS because I've been avoiding dealing with this whole situation.

3 A substitute for return (SFR) is basically when the IRS files a tax return on your behalf using information they have (like your W-2s and 1099s) - but they don't include any deductions or credits you might be entitled to. They just calculate your tax based on the standard deduction and your reported income. Stop ignoring those letters immediately! Open them all and see what they're saying. If they're threatening an SFR, you still have time to file your own return which will replace their substitute. The SFR will almost always result in a higher tax bill because the IRS doesn't know about your potential deductions, business expenses, or other tax situations that could lower your liability.

13 You won't lose eligibility for the child tax credit by filing late. The enhanced child tax credit was for 2021, and 2022 went back to the regular credit (up to $2,000 per qualifying child). As long as you file within the 3-year window to claim a refund, you can still receive those credits. As for stimulus payments, the last economic impact payment (stimulus) was issued in 2021, so there weren't any new stimulus payments for the 2022 tax year. If you missed claiming any previous stimulus payments, you would have needed to claim them on your 2021 return as a Recovery Rebate Credit.