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I'm a financial planner (not an accountant) and I generally suggest clients consider an accountant when ANY of these are true: - Self-employment income - Rental properties - Income over $400k (potential for more complex tax strategies) - Multiple state returns - Stock options or RSUs - Recent major life changes (marriage, divorce, child, home purchase) From what you've described, you're borderline - the upcoming marriage to another high earner might make it worth at least a consultation. Sometimes a good accountant pays for themselves in tax savings!
Thank you for this breakdown! Would you recommend getting a consultation just for the first year of marriage to understand any new strategies, or is this something we should plan to do annually going forward?
I'd recommend a consultation for the first year of marriage to understand the new strategies and options available to you as a married couple. After that initial consultation, you can assess whether the accountant provided enough value to continue annually. Many clients find that an every-other-year check-in with an accountant is a good compromise - they get periodic professional review while handling the more straightforward years themselves. Given both your high incomes, there may be ongoing tax planning opportunities that make annual meetings worthwhile, but this is something you can determine after that first consultation.
Everyone is talking about income thresholds but nobody's mentioning TIME VALUE! I make $180k and use an accountant simply because my time is worth more than the $350 I pay him. Could I do it myself? Sure. Do I want to spend 5-6 hours researching tax law and entering data? Hell no. Consider what your hourly rate is at work and how many hours you'll spend on taxes. If an accountant costs less than (your hourly rate Ć hours spent), it's worth it regardless of income level or complexity.
This is such an underrated comment. I spent 8 hours doing my taxes last year with similar income to OP, and all to save maybe $400 on an accountant? That's a terrible hourly rate for my weekend time!
Has anyone actually calculated how much tax you end up owing on forgiven debt? Like for $10,000 in forgiven debt, what would the actual tax bill be? I'm in a similar situation but with about $7,000 in forgiven medical debt.
IMPORTANT: Keep in mind the 1099-C should be issued for the year the debt was actually cancelled, not when they decided to send you the form. I had a creditor send me a 1099-C for debt they forgave two years earlier, and it caused all kinds of problems. If the forgiveness happened in a previous tax year, you might need to file an amended return for that year instead of including it on this year's taxes.
This happened to me too! The credit card company sent me a 1099-C in 2023 for debt they actually cancelled in 2022. I had to file an amended return and it was such a hassle. Check the "Date of Identifiable Event" box on your 1099-C form - that's the date that matters for tax purposes, not when they sent the form.
Thanks for pointing this out! I just double-checked my 1099-C and the date listed is from this year, so I think I'm okay. But good to know for everyone else that the date on the form matters!
One thing nobody's mentioned yet - since you're becoming a 1099, you'll need to make estimated quarterly tax payments. This was the biggest shock to me when I switched to contracting. You'll need to pay taxes four times a year (Apr 15, Jun 15, Sep 15, Jan 15) instead of having them withheld from each paycheck. If you don't, you could face underpayment penalties. Given your income level, you should definitely look into an S-Corp election once you've been doing this for a while. At $105k, you could potentially save thousands by taking part of your income as distributions instead of all as self-employment income.
Can you explain more about the S-Corp thing? I'm in a similar situation to OP and keep hearing about S-Corps but don't really understand the benefit.
Sure! With an S-Corp, you pay yourself a "reasonable salary" that's subject to self-employment tax (the 15.3% for Social Security and Medicare). Then you can take the rest of your profit as distributions, which aren't subject to self-employment tax. For example, if your business makes $105k, you might pay yourself a salary of $65k (which would be subject to self-employment tax) and take $40k as distributions (which would only be subject to income tax, not self-employment tax). This could save you about $6,120 in self-employment taxes (15.3% of $40k). The key is that your salary must be "reasonable" for your industry and role - you can't just pay yourself $20k and take $85k as distributions. There are also additional costs like increased accounting fees and payroll processing. Generally makes sense once you're earning over $80-100k consistently.
Don't overlook the QBI deduction (Qualified Business Income) - as a 1099 contractor you can deduct up to 20% of your qualified business income! This is HUGE and many people miss it. So if your net business income after expenses is $98,000, you might be able to deduct another $19,600 from your taxable income. This is on top of your solo 401(k) contributions and business expenses. The solo 401(k) is definitely your best bet though - the ability to contribute both as employer and employee is a game changer.
But doesn't the QBI deduction phase out at higher income levels? Im not sure OP would qualify with $105k income.
One option nobody's mentioned is free tax filing through the IRS Free File program. If your income is under $73,000, you can use brand-name tax software for free through IRS.gov. Even if you make more than that, you can use Free File Fillable Forms. I've used this for years with investment income (1099s) and it works great. You could file the extension now for free AND possibly do your full return for free when you get back.
Really? I thought Free File was only for super simple returns. Can it handle things like stock sales and early retirement distributions? I'm not confident in doing all those calculations myself.
Free File through partner companies (like TurboTax, H&R Block, etc.) can absolutely handle stock sales and retirement distributions if you qualify by income. The software is the same as their paid versions, just offered free through the IRS partnership. If you use Free File Fillable Forms (the direct IRS option), it's basically just electronic versions of paper forms with basic calculations. That option requires more tax knowledge since you need to know which forms to fill out, but it's still free and available to everyone regardless of income. For your situation, I'd recommend using one of the Free File partner software options to file your extension now. Then when you return, you can use the same service to complete your full return with all your investment documents. Much better than paying hundreds to a storefront preparer!
I work seasonally on fishing boats in Alaska and deal with this every year. My advice: DEFINITELY file the extension. I made the mistake of not filing once and the failure-to-file penalty was brutal compared to just the failure-to-pay. When you get back from your contract and have cash, call the IRS and set up a payment plan if needed. They're actually pretty reasonable to work with if you're proactive and honest about your situation.
I second this. The IRS is much more accommodating than people expect when you're upfront about your situation. I've been on payment plans twice and it was simple to set up. The interest rates are usually better than credit cards too.
Oliver Becker
I had a similar situation with my husband's 401k last year. For the BP code, I needed to manually tell TurboTax that the taxable amount was $0. Here's what I did: In TurboTax, after entering the 1099-R information, there should be an option to "Review" the entry. Within that review screen, there's a way to override the taxable amount. I had to dig around a bit, but it was something like "Edit" or "Override" next to the taxable amount field. For your second 1099-R with the 8B code, the earnings should indeed be taxable in 2021, so TurboTax is handling that correctly at least.
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GalacticGuardian
ā¢Thank you for the specific TurboTax guidance! I found the override option exactly where you described. After adjusting it, my tax calculation looks much more reasonable now. One more question - did you have to file any additional forms to explain the override, or did TurboTax handle that automatically?
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Oliver Becker
ā¢TurboTax handled the override automatically without requiring additional forms. The software does add a note to your return that explains the override, which is actually helpful in case of an audit. Just make sure to keep copies of both 1099-Rs and any documentation that came with the distribution explaining the excess contribution correction. That paperwork is your proof if the IRS ever questions the override.
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CosmicCowboy
The people saying you don't need to amend your 2020 return are correct. For Roth 401k excess contributions, the correction is handled in the distribution year (2021). For anyone else dealing with this: distribution codes are crucial for understanding tax treatment: - BP = Roth contribution being returned (not taxable) - 8B = Earnings on those excess contributions (taxable) If your tax software doesn't handle this correctly, switch software! I've found FreeTaxUSA handles these retirement distribution codes much better than TurboTax for complex situations.
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Natasha Orlova
ā¢Does FreeTaxUSA handle state returns well too? I've been considering switching from TurboTax due to their constant price increases.
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CosmicCowboy
ā¢Yes, FreeTaxUSA handles state returns quite well! They charge a small fee for state filing (much less than TurboTax), but federal filing is completely free regardless of complexity. I switched three years ago and haven't looked back. For retirement distribution issues like this, their interface explicitly asks about each distribution code and automatically applies the correct tax treatment. For something like a BP code, it immediately marks it as non-taxable without requiring manual overrides.
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