Thanks for mentioning the SEP IRA option! Do you know what the contribution limits are compared to the Solo 401k? And is it true there's less paperwork involved? The Form 5500 requirement for Solo 401ks once you hit $250k sounds like a potential headache.

For a SEP IRA, you can contribute up to 25% of your net self-employment income with a maximum of $66,000 for 2023. With a Solo 401k, you can contribute $22,500 as an employee plus that same 25% of income as the employer contribution, still capped at $66,000 combined. The paperwork difference is significant. With a SEP, there's no annual filing requirement regardless of account size - just set it up once and make contributions. Solo 401ks require Form 5500-EZ filing once assets exceed $250,000, which isn't super complicated but is an extra annual task. For many small business owners, the simplicity of a SEP outweighs the potential for slightly higher contributions with a Solo 401k.

Did you have to start running payroll for yourself to contribute to the Solo 401k? That's the part that confuses me with my LLC.

Thanks for the tip! I actually went back and checked my W-2 and you're right - the retirement plan box is checked but I definitely didn't select that in TurboTax. I didn't even notice that option when going through the questions. Do you remember where in TurboTax I need to go to fix this?

You should be able to find it by going back to the W-2 entry section in TurboTax. Look for a section that says something like "Does your employer offer a retirement plan?" or there might be a specific checkbox when entering your W-2 information. If you're not seeing it there, try looking in the "Deductions & Credits" section under retirement savings options. Sometimes TurboTax splits these questions into different sections which can cause these kinds of mismatches. Once you get the information entered correctly to match your W-2, the paper filing requirement might disappear.

This is a good point. I ran into this with New York one year because I'd moved mid-year and the address discrepancy triggered a paper filing requirement. Double check all your personal info matches what the IRS has on previous returns or communications.

Does this mean you still have to pay taxes during that waiting period? Our animal rescue just applied for 501(c)(3) status but we're not sure how to handle income and expenses while waiting.

Generally, if your 501(c)(3) application is ultimately approved, the tax-exempt status is retroactive to your date of incorporation, provided that was within 27 months of your application. So technically, you might not owe taxes even during the waiting period. However, you still need to file the appropriate information returns (usually Form 990 series) during this time. It's also smart to set aside funds just in case your application is denied and you do end up owing taxes on income received during this period. For your animal rescue, I'd recommend tracking all income and expenses very carefully, following non-profit accounting practices from the start, and being transparent with donors about your pending status.

This is actually an important distinction that others haven't mentioned! Are we talking about personal tax returns or the organization's filing? I've been assuming the organization's taxes, but now I'm confused.

Thank you for sharing your experience! That's really reassuring. Did you use any specific tax software to file your amended return or did you work with a professional? I'm trying to figure out the best way to handle this correctly.

I used TurboTax to prepare the amended return since that's what I'd used for my original filing. It walks you through the process pretty well. I just entered the additional income and it recalculated everything. For peace of mind, I did have a tax preparer review it before submitting just to make sure I did it right. It was worth the small fee to have a professional double-check my work. If your situation is fairly straightforward (just missing income), you can probably handle it yourself, but having someone review it isn't a bad idea.

This isn't great advice. While it's true the IRS prefers to collect rather than prosecute, deliberately not reporting income is tax evasion. Your cousin was lucky. The IRS can and does pursue criminal charges in some cases, especially when they can prove intent.

I'm not too worried about estate taxes since my total assets are well under the exemption limit. Are there any other advantages to gifting some stock now versus keeping everything for the step-up basis approach?

If your estate is below the exemption threshold, then maximizing the step-up basis becomes your primary objective, making your original plan more advantageous. One alternative worth considering is gifting stocks that have minimal gains or even losses, since those wouldn't benefit much from step-up basis anyway. This allows you to maintain ownership of your highly appreciated assets for the step-up benefit while still giving your grandchildren some investment exposure during your lifetime. It can also be a good educational opportunity to teach them about investing if they're old enough.

The Roth conversion idea is solid but completely separate from the step-up basis question. Step-up applies to taxable accounts, not IRAs. Roth conversions are about income tax, not capital gains. Both strategies can work together in a comprehensive plan though.