This is really helpful - I hadn't even thought about who should claim our daughter if we stay with MFS. Is there any downside to me claiming her instead of my wife?

There's no downside to the higher-earning spouse claiming the child in most cases. The value of exemptions and credits typically increases with income (up to certain thresholds). If you're in a community property state (AZ, CA, ID, LA, NV, NM, TX, WA, or WI), there may be additional considerations since income and deductions often must be split equally regardless of who earned what. Check your state's specific rules as they can significantly impact your overall tax situation when filing separately.

Also retirement account options! If your income is too high for Roth IRA contributions when filing jointly, filing separately actually makes it worse, not better. The income limit for MFS is just $10k!

Thanks for bringing that up. Do you know if there's an easy way to tell if it's a simple or complex trust? The paperwork I have doesn't specifically say either way.

You can usually determine if it's a simple or complex trust by looking at the trust document itself. A simple trust requires that all income be distributed annually to beneficiaries, doesn't allow for charitable contributions, and doesn't distribute principal. A complex trust has more flexibility - it can accumulate income, make charitable contributions, or distribute principal. The K-1 form might also give you clues. If you see distributions of corpus (principal) or if some income is being retained in the trust rather than distributed, it's likely a complex trust. You could also ask the trustee directly - they should definitely know how the trust is structured. This matters because complex trusts might distribute both income and principal, and principal distributions generally aren't taxable to the beneficiary.

I've used H&R Block's software for my son's trust income and found it worked pretty well. It has a specific section for K-1 entries and walks you through each line item. Much more straightforward than trying to figure it out manually. TaxSlayer also has decent K-1 support for a lower price if you're looking for alternatives.

1 Oh that's an important point I hadn't considered! So are you saying that the $3500 work-study might already be enough earned income to maximize our Additional Child Tax Credit without needing to make the scholarship taxable?

14 It depends on your total tax situation and other income. The refundable portion of the Additional Child Tax Credit is calculated as 15% of earned income above $2,500, up to the maximum credit amount. So with $3,500 work-study, that's $1,000 above the $2,500 threshold, which would give you $150 in refundable credit (15% of $1,000). If you need more than $150 of the refundable portion, then you might consider other options, but making the scholarship taxable won't help since it's not earned income. And as others pointed out, it could hurt your Premium Tax Credit. Your best bet is to run the calculations both ways with actual tax software to see which approach gives your family the best overall result.

22 Thanks for the correction on the threshold! Do you know if there's a way to calculate exactly how much including his income would reduce the Premium Tax Credit? I'm trying to figure out if it's worth it.

Thanks for this clarification - that makes a lot of sense. I think what I was trying to understand is more about the timing of purchases and legitimate ways to reinvest in the business. Definitely not looking to do anything sketchy or illegal! So for example, if I'm planning to buy that embroidery machine anyway, buying it in December vs January could make a tax difference?

Exactly right! That's legitimate tax planning. If you're going to buy that $5,500 embroidery machine anyway, and you've had a profitable year, purchasing in December lets you deduct it from this year's income (assuming you place it in service before year-end). Remember too that reinvesting profits in your business (buying new equipment, upgrading systems, purchasing inventory) naturally reduces your taxable income because these are legitimate expenses or depreciable assets. This is the legal and proper way to "reduce" taxable income - by growing your business with real expenses, not manufacturing fake ones.

This is great advice! What system do you use to track your materials? I've been trying to figure out a good inventory management approach for my small leather goods business.

How did you come up with that $60-75 figure? Is there a simple calculation to determine the right extra withholding amount?

It's a rough estimate based on the tax brackets. When you have a second job that makes about 25-30% of your main job's income (like the $17k vs $58k in this case), you're typically looking at withholding an extra 22% of the second job's income (since that income is "stacked" on top of your main income and falls into your highest marginal tax bracket). $17,000 × 22% = $3,740 extra tax needed per year. Divide by number of pay periods (usually 26 if biweekly) = about $144 per paycheck. But you can withhold less if your second job is already withholding something, which is why I suggested $60-75 as a starting point. The IRS Withholding Calculator will give you a more precise figure based on your specific situation.

You're correct that it all gets reconciled when you file - you're not evading taxes by having multiple jobs. The issue is just that you might end up with a large tax bill instead of getting a refund. If the amount you owe is large enough (generally over $1,000), you might also face underpayment penalties from the IRS.