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Don't forget about investment interest expense if you have any margin loans or investment-related interest. Also, if you paid any tax preparation fees for your investments, those can be deductible too. I've been itemizing for years and it's usually worth it for me because of my mortgage interest and charitable giving combined. Oh, and definitely keep track of any major medical expenses including mileage to/from doctors appointments - those little trips add up if you had a lot of medical visits!
I do have some investments but nothing on margin. What about tax preparation software? I usually spend around $150 on TurboTax Premium - is that deductible if I itemize?
Unfortunately, tax preparation fees including software like TurboTax aren't deductible for individuals anymore. That deduction was eliminated for tax years 2018-2025 by the Tax Cuts and Jobs Act. However, if you have self-employment income or rental property income, you can still deduct the portion of your tax prep fees related to those business activities on Schedule C or Schedule E. But for regular personal tax preparation, those costs aren't deductible currently.
Has anyone tried "bunching" their charitable contributions? My CPA suggested donating double one year, then nothing the next, to alternate between itemizing and taking the standard deduction. Apparently it maximizes the tax benefit over a two-year period.
Bunching works really well! We do this with our church donations - double up in December and January of the same tax year, then skip a year. Our CPA ran the numbers and we save about $1,800 every two years compared to giving the same amount spread evenly. Just make sure your charities are cool with the irregular donation schedule.
To directly answer your question: Your federal taxes mainly pay for Social Security (which you'll get later), Medicare (ditto), defense, and interest on national debt. State taxes typically fund education, transportation, and healthcare programs. Local taxes go to schools, police, fire departments, and parks. The reason you feel stuck is you're in what policy experts call the "subsidy cliff" - you make too much to qualify for assistance but not enough to feel comfortable. It's a real policy problem. What many don't realize is that other countries with stronger safety nets often have much higher taxes on EVERYONE, not just the rich. For example, European countries typically have higher VAT (sales taxes) affecting all citizens and higher income taxes on middle incomes.
This subsidy cliff term is exactly what I've been experiencing but didn't have a name for! Do you know of any good resources that explain this phenomenon more? Or are there any efforts to address this problem in policy discussions?
The "subsidy cliff" is well-documented in healthcare policy discussions - the Kaiser Family Foundation has excellent resources explaining how it works, particularly with ACA marketplace subsidies. Urban Institute and Brookings also have published research on this topic. There are ongoing policy discussions about smoothing these cliffs through more gradual phase-outs of benefits rather than hard cutoffs. Some proposals include expanding premium tax credits, creating public options for various services, or implementing more universal programs that eliminate means-testing altogether. Unfortunately, these solutions require significant policy changes that have been difficult to achieve in our current political environment.
The problem isn't how much tax we pay, it's WHO pays it. I make similar to you and pay ~25% while billionaires pay like 8% effective rates through loopholes and capital gains rates. The system is designed to burden workers while letting the wealthy off easy. If we closed corporate and billionaire loopholes, we could absolutely have universal healthcare, better infrastructure, and lower taxes for people making under $100k. But both parties are bought by corporate interests so nothing changes.
This is partially true but oversimplified. The top 1% pay about 40% of all federal income taxes, while the bottom 50% pay about 3%. The issue isn't that the wealthy don't pay taxes - it's that our tax system has inefficiencies, loopholes, and different treatment for different types of income. Capital gains being taxed lower than wages is a policy choice that benefits investors disproportionately.
One thing that hasn't been mentioned is a potential restructuring of your agreement with your business partner. If you're consistently taking distributions beyond your 5% ownership, maybe your ownership percentage doesn't actually reflect your value to the company. Consider renegotiating your equity stake to better align with the economic reality of the business. This would solve the distribution problem long-term because your K-1 would better reflect what you're actually taking from the business. Another approach is to look at compensation strategies beyond just salary and distributions. Could part of your compensation be structured as guaranteed payments? Unlike distributions, these ARE deductible by the S-Corp before profits are allocated via K-1s.
The idea of renegotiating my equity stake is interesting. My partner and I have been operating this way for years without really thinking about the tax consequences. Do guaranteed payments still incur self-employment tax like salary would?
Yes, guaranteed payments do incur self-employment tax similar to salary. That's the downside compared to distributions. However, unlike regular salary which needs to meet "reasonable compensation" standards, guaranteed payments can be tied to specific services or capital you provide to the business. They're especially useful when partners contribute unequally in ways not reflected by ownership percentages. For the equity restructuring, you might consider a gradual approach where your percentage increases over time based on predefined performance metrics. This could help align your tax situation with the economic reality without creating a sudden shift in the business relationship.
Has anyone here actually tried using a loan structure instead of distributions? Our S-Corp (I'm a 30% owner) established a shareholder loan program where we can take advances beyond our distribution percentages, and then either repay them or have them forgiven as future distributions when our basis is sufficient. Seems cleaner than just taking distributions beyond ownership percentage, but I'm not sure if there are downsides.
Don't forget to check your state tax situation too! A lot of people focus only on federal tax identity theft but forget the fraudsters often file state returns too for extra refunds. I had someone file a fake federal AND state return in my name. The state process for disputing fraud is completely different from the federal IRS process.
Do you have to file separate identity theft reports with both the IRS and your state's tax agency? Or does reporting to the IRS automatically notify the state?
You definitely need to file separate reports. The IRS doesn't automatically notify your state tax agency. Each state has their own process for handling tax identity theft, and you need to contact them directly. Most states have a form similar to the IRS Form 14039, but it'll be specific to your state. Check your state's department of revenue website for their identity theft reporting procedures. In my case, I had to submit additional documentation to my state that wasn't required for the federal process.
One thing that helped me when I went through this - get an Identity Protection PIN (IP PIN) from the IRS for future filing! After my identity theft case was resolved, I signed up for an IP PIN and now no one can file electronically using my SSN without that special code, which changes every year.
Can anyone get an IP PIN or do you have to be a victim of identity theft first? I've never had an issue but want to prevent one!
Anyone can get an IP PIN now! The IRS used to only offer them to identity theft victims, but they've expanded the program. You can sign up through the IRS website using their "Get an IP PIN" tool. You'll need to verify your identity through their secure access process. The PIN is a six-digit number that changes every year. The IRS sends you a new one each December/January for the upcoming tax season. It provides an extra layer of security because even if someone has your SSN, they still can't file electronically without that PIN. Definitely worth doing as a preventative measure!
Marina Hendrix
Something no one's mentioned yet - if you're self-employed (sounds like you are with your small business), you might consider legitimately hiring your friend for some actual work instead of just gifting money. If you have a genuine need for help (organizing inventory, marketing, website work, etc.), you could pay them as a contractor or employee, which would be a business expense for you and earned income for them. Obviously it has to be real work with reasonable compensation - you can't just fake it. But might be a win-win if there's actual work they could help with.
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Alejandro Castro
ā¢That's an interesting idea I hadn't considered! My friend actually has some web design experience that could help my online store. Would I need to file any special paperwork if I paid him as a contractor? And would this potentially impact any benefits he currently receives?
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Marina Hendrix
ā¢If you pay him as a contractor and it's $600 or more in a year, you'll need to issue a 1099-NEC form to both him and the IRS. It's pretty straightforward - you'll need to get him to fill out a W-9 form first to collect his tax information. As for benefits, that's definitely something to consider. Earned income could potentially impact certain government benefits he receives, depending on the programs and income thresholds. This is something he should look into carefully before you proceed, as the extra income might reduce benefits by more than the amount earned in some cases. He might want to check with his benefits counselor to understand exactly how additional income would affect his specific situation.
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Justin Trejo
Just to clarify something I see getting mixed up in this thread - Cost of Goods Sold (COGS) isn't technically a "deduction" in the same way as business expenses. It's subtracted from your revenue to determine your gross profit BEFORE you take your business deductions. So on your Schedule C, you'll report: Revenue - COGS = Gross Profit Gross Profit - Business Expenses = Net Profit This matters because some tax limits are based on your gross profit, not your net. Also make sure you're tracking inventory properly! Beginning inventory + Purchases - Ending inventory = COGS for the year.
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Alana Willis
ā¢This is super helpful! Does inventory include shipping costs to get the products to me? Or are those separate expenses?
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