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If your income was reduced because of maternity leave, did you receive any disability or family leave payments? Some states provide these benefits, and they might count differently for tax purposes than regular wages. This could potentially affect your total "earned income" calculation for the child tax credit. Also, check if you qualify for the Earned Income Tax Credit (EITC) with your income level and two dependents - that might help offset some of the reduced child tax credit.
Yes actually I did get short-term disability for about 6 weeks, but it wasn't much (about $3,200). I didn't realize that might count differently! Does disability count as earned income for the child tax credit calculation? I did qualify for the EITC which helped, but was still counting on more from the child tax credit since I got the full amount last year.
Short-term disability payments generally don't count as earned income for purposes of the child tax credit calculation. Earned income typically includes only wages, salaries, tips, and net earnings from self-employment. That explains part of your situation. If your W-2 wages were $6,630 but some of your total income came from disability payments, then only the W-2 amount would count toward the earned income calculation for the Additional Child Tax Credit. Good that you qualified for the EITC though - with two children and your income level, that can be a significant help.
Has anyone tried amending their tax return from last year to claim missed credits? I just realized I had a similar situation with reduced income during maternity leave but didn't know about how the child tax credit calculation worked. I think I might have left money on the table.
You can definitely file an amended return using Form 1040-X, but there's a 3-year deadline from the original filing date. So if you're talking about last year's taxes, you have plenty of time. Just make sure you have documentation for everything and be prepared for a long wait - amended returns can take 16+ weeks to process right now.
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.
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?
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.
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.
This is super helpful! Does inventory include shipping costs to get the products to me? Or are those separate expenses?
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.
QuantumQuasar
Don't forget about charitable contributions for 2023! Even though it's 2024 now, if you make a credit card donation before the filing deadline and charge it to your card, you can still count it for 2023 as long as you itemize. Also, check if your state has a 529 plan with state tax deductions. Some states allow you to deduct contributions to 529 plans from your state taxes, and some let you make contributions up until the tax filing deadline.
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Zainab Omar
ā¢Wait really? I can still make charitable donations now that count for 2023? Does this work if I take the standard deduction or only if I itemize?
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QuantumQuasar
ā¢This only works if you itemize your deductions. If you're taking the standard deduction, additional charitable contributions won't help reduce your taxes. The standard deduction for 2023 is $13,850 for single filers, so your total itemized deductions (including charitable contributions, mortgage interest, state and local taxes up to $10,000, etc.) would need to exceed that amount to make itemizing worthwhile. For your 2023 taxes, there's unfortunately no above-the-line charitable deduction available for those taking the standard deduction. That was a temporary COVID provision that has expired.
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Connor Gallagher
For your rental property - if you haven't already done so, review all receipts for repairs vs. improvements. Repairs can be fully deducted in 2023 while improvements need to be depreciated. Also, did you drive to your rental for any reason? Those miles are deductible! Also, since you own your primary residence, don't forget to look into property tax deductions if you itemize. You mentioned being a W2 employee - check if you contributed the max to your 401k if you have one. Unfortunately that's too late to change for 2023, but good for planning 2024.
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Amara Okafor
ā¢Thanks for the rental property tips! I actually did quite a few visits last year but wasn't tracking mileage. Can I estimate it now based on my address and the property address for those trips I know I made?
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Connor Gallagher
ā¢You can use a reasonable estimate based on the distance between your home and the rental property multiplied by the number of trips you can substantiate. Just be prepared to justify those trips if asked - having calendar entries, texts with tenants, or receipts from the same days as your visits can help establish that you actually made those trips. For future reference, it's best to keep a contemporaneous mileage log with dates, starting/ending mileage, and the purpose of each trip. Many people use smartphone apps for this now, which makes it much easier to track.
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