Thanks for clearing that up! So there's no way to reorder the credits even with additional forms. That's disappointing but good to know. Do you know if adjusting withholding for next year would help maximize the use of carried-forward adoption credits? I'm trying to ensure we can use as much as possible of the carried forward amount.

Adjusting your withholding won't directly help you use more of the adoption credit, as that doesn't change your actual tax liability - it just changes how much is paid throughout the year versus at filing time. What could help is planning to have more taxable income in future years (if possible) or timing certain deductions differently. For example, you might consider deferring some deductions to a future year when you don't have as many credits, which would leave more tax liability for your adoption credit to offset. A tax professional could help you model different scenarios based on your specific situation to maximize the credit usage over the 5-year carryforward period.

That's really interesting! I hadn't considered filing an amended return. Did you have to provide additional documentation to support the changes? And approximately how long did it take for the amended return to be processed? I'm wondering if this approach might work for us too.

I never filed an amendment because I didn't realize the mistake until recently when I was going through old tax documents. Would it be worth filing one now even though it's past the 3-year window just to have it on record? Would the Tax Benefit Rule apply to capital gains from a home sale? I'm not super tax-savvy and trying to figure out if I should hire someone to help me fight this.

Filing an amendment now even though it's beyond the refund window could potentially help establish your good faith efforts to comply with tax law. While you won't get the refund, having it documented could support your case if you request penalty abatement for the current issue. The Tax Benefit Rule typically wouldn't apply directly to capital gains from a home sale in your situation. It's more relevant when you take a deduction in one year and then recover that expense in a later year. For your specific case, I'd recommend consulting with a tax professional who specializes in IRS disputes since there might be other strategies available based on your full tax history.

I used OIC last year for a similar situation and got my tax debt reduced by about 70%. But you have to qualify based on your income, assets, and ability to pay. It's not just available because you disagree with the assessment. And you'll need to be current on all your other tax filings to qualify.

Thanks for the detailed list! I didn't realize payment processing fees were deductible - that's actually a significant amount for my business. Is there a good rule of thumb for determining what percentage of my internet and phone to deduct? I use both for business but obviously personal use too.

For internet and phone, you need to determine a reasonable business-use percentage. If you use your cell phone 70% for business and 30% personal, you can deduct 70% of those costs. Just make sure you can justify the percentage if asked. For payment processing fees, absolutely deduct them all! Those PayPal/Stripe/credit card fees add up quickly and are 100% legitimate business expenses. Don't forget the monthly fees plus the per-transaction percentages. Many new business owners miss these, but they can easily add up to thousands of dollars in deductions over a year.

I second this. Using a tax professional my first 2 years taught me how to properly do my taxes. Now I use TurboTax but actually understand what I'm doing. The education alone was worth the fee, and they likely will save you more than their cost.

Thank you for this explanation! I just checked and it looks like they ARE filing something called an 1120-S now instead of the Schedule C. So does this mean we're actually making the same amount of money but it just looks different on paper? Could this hurt my chances for need-based scholarships?

Yes, that's exactly what's happening! With an S-Corporation (Form 1120-S), the income gets reported differently even if the actual money coming in is the same. The business income flows through to your parents' personal return on Schedule E rather than Schedule C. This could definitely impact your need-based scholarships because the FAFSA and many scholarship programs look at adjusted gross income. With an S-Corp structure, sometimes more of the business income flows to the personal return because expenses get handled differently. Your parents should talk to their tax preparer about optimizing their S-Corp approach for both tax savings and financial aid purposes. There are legitimate strategies to properly categorize business expenses on the 1120-S that might help reduce the reported income while still following tax laws correctly.

This is actually a really good point. When I switched my restaurant to an LLC, we had to change how we tracked inventory and it made our first year look WAY more profitable than it actually was because of timing differences. It evened out the next year.

For the pro-rata rule, does that apply to nonresident aliens the same way? I've heard conflicting things about how 1040NR filers have to calculate this.

Yes, the pro-rata rule applies to nonresident aliens filing 1040NR the same way it does to resident taxpayers. When you convert any portion of a traditional IRA to a Roth IRA, you must consider all your IRA balances collectively (including SEP and SIMPLE IRAs). The calculation is the same: you determine what percentage of your total IRA balance consists of non-deductible contributions, and that same percentage of your conversion will be tax-free. The rest is taxable income in the year of conversion. This is all reported on Form 8606, and the rules don't differ based on residency status.

I did this last year on my 1040NR. The recharacterization part wasn't too bad - my custodian handled most of it. For the tax forms, I reported the nondeductible contribution on Form 8606. Then about 2 months later, I converted it back to Roth. The following year I had to report the conversion on my tax return. The 6% excess contribution penalty would have been more expensive in my case. Plus, doing the recharacterization followed by conversion taught me how the system works for future years.