Thanks for mentioning this! I actually did do some freelance work last year that I reported on Schedule C. Would I need to open a specific type of account for this SEP IRA thing? And does the contribution have to be from the freelance income specifically or can it come from my savings?

You'll need to open a specific SEP IRA account at a brokerage like Vanguard, Fidelity, or Schwab. Most have simple online applications and you can designate it as a SEP IRA during the account creation process. The contribution can come from any of your personal funds - it doesn't have to be directly from your freelance earnings. The important thing is that your contribution can't exceed 25% of your net self-employment income (after deducting expenses and the self-employment tax deduction). If you made $10,000 in net profit from freelancing, you could contribute up to about $2,500 to a SEP IRA which would directly reduce your AGI by that amount.

Qualified Charitable Distributions (QCDs) only work if you're 70.5 years or older, and they're made directly from your IRA to the charity. They don't technically reduce your AGI but they do reduce your taxable income. If you're younger, regular charitable contributions won't reduce AGI either - they're itemized deductions that come after AGI is calculated.

Thanks for bringing this up. I'm worried about how the 401K distribution might affect our Earned Income Credit. Do you know if retirement distributions count as income for calculating the EIC? We're really counting on that credit this year with our reduced income.

Yes, 401k distributions do count as income for calculating the Earned Income Credit, which is something to be aware of. The distribution could potentially reduce your EIC amount since it increases your AGI. However, it won't completely disqualify you if your overall income still falls within the EIC thresholds. For the Child Tax Credit, the same principle applies - the 401k distribution increases your income, which could affect the amount you receive if you're near a phase-out threshold. In your specific situation though, if you're truly below the poverty line even after counting the distribution, you'll likely still qualify for the full credits, but it's definitely something to watch when you're preparing your return.

Is fixing a foundation considered a qualified hardship though? I thought it was limited to preventing foreclosure, medical expenses, education, or first-time home purchases. I don't think home repairs qualify unless they were to repair damage from a federally declared disaster.

That's super helpful info about the timing! So if I want this for 2025 tax year, I'd need to file the S-Corp election by March 15, 2025? What if I form the LLC now in 2024 - does that change anything with the timing?

If you form your LLC now in 2024 but want the S-Corp election to take effect for the 2025 tax year, you would need to file Form 2553 by March 15, 2025. If you plan to operate the LLC for the remainder of 2024 before the S-Corp election kicks in, your LLC would be taxed as either a sole proprietorship (single-member LLC) or partnership (multi-member LLC) by default for 2024, and then as an S-Corp starting January 1, 2025. During that interim period before the S-Corp election takes effect, you'd still be subject to self-employment tax on all profits. Many people form their LLC in Q4 of the year and then immediately file the S-Corp election for the upcoming year to minimize this interim period.

I'm in TX and we don't have the state franchise tax, so that saves a lot! My accountant says the breakeven point is around $60-70k in profit - below that and the administrative costs eat up the SE tax savings. Above $100k is where you really start seeing the benefits.

2 This is super important info! How can you check if your parents are claiming you? My parents and I don't really talk about taxes, but I'm pretty sure they might be claiming me since they send me some money every month for living expenses. Would that disqualify me completely?

4 The most direct way to check is simply to ask your parents if they're claiming you as a dependent. There's no database you can access to verify this yourself. If your parents are sending you money for living expenses, that doesn't automatically mean they're claiming you. The dependency test is more complex than that - it involves your age, student status, how much of your own support you provide, and other factors. If you provide more than half of your own total support for the year, your parents generally can't claim you even if they help with some expenses.

23 This is super helpful! Would Venmo or PayPal transfers to classmates count as documentation? That's how I've been paying for most of my secondhand books.

Ugh I didn't even think about state taxes! I'm in California - does anyone know how they handle capital gains? Is it just added to regular income?

California taxes all capital gains as ordinary income at your marginal tax rate, which can go as high as 13.3% for high-income earners. There's no special capital gains rate like there is federally. So your $32,000 in gains will be taxed at your regular CA income tax rate. For other readers: States vary widely in how they handle capital gains. Some like Nevada, Florida, Texas, Washington, and Wyoming have no state income tax at all, so no capital gains tax. Others like New Hampshire only tax investment income.

Absolutely worth it! You can offset capital gains completely with capital losses, and if your losses exceed your gains, you can deduct up to $3,000 against ordinary income. Any remaining losses can be carried forward to future years. Just be careful of wash sale rules if you plan to buy back similar investments within 30 days.