Anyone else planning to amend previous returns in light of this Limited Partner Self Employment exemption ruling? My accountant says we should go back and amend the last three years, but I'm worried that would just trigger an audit.

For anyone wondering about the Limited Partner Self Employment exemption ruling, I consulted with a former IRS attorney yesterday. He believes the ruling will likely stand on appeal because it's based on a functional interpretation of the statute rather than adding new requirements. His take is that anyone who was truly a passive investor with no management role might still have grounds to exclude income from SE tax. The real targets are active participants using the LP structure primarily as a tax strategy despite material participation in the business. He suggested documenting your lack of involvement if you want to maintain the exemption - meeting minutes showing you don't participate in management decisions, time logs showing minimal hours, etc.

One practical reason the effective tax rate matters: understanding your true tax burden helps with budgeting throughout the year. When I was looking at withholdings from my paycheck, I kept thinking "why are they taking only 15% when I'm in the 22% bracket?" The answer was that my effective rate was actually around 15%. This helped me adjust my withholdings more accurately so I wouldn't get a huge refund (basically an interest-free loan to the government) or owe a bunch at tax time. Knowing your effective rate lets you more accurately plan your actual take-home pay!

The way I explain tax rates vs effective rates to my friends: imagine you have 5 buckets. - First bucket (up to $11,000): taxed at 10% - Second bucket ($11,001-$44,725): taxed at 12% - Third bucket ($44,726-$95,375): taxed at 22% ...and so on Your dollars "fill up" each bucket before moving to the next. So your first $11k is always taxed at 10%, no matter how much you make total. The effective rate is just the average rate across all your filled buckets combined. This is why getting a raise that "puts you in a higher bracket" only affects the dollars that actually reach that new bracket!

Another option worth exploring is contacting your state's unemployment office. Sometimes they have employer information on file even when the IRS transcript is incomplete. I had to do this when filing back taxes from 2018, and the state labor department had the EINs for two companies that had gone bankrupt. Also, if your friend contributed to a 401k during that time, the plan administrator might have records with the employer information. Same goes for any health insurance he had through those employers - the insurance company may still have the employer EIN on file.

One thing nobody's mentioned yet - you should consider the statute of limitations for refunds when filing back taxes. If your friend is owed money from the IRS for 2020, he needs to file before April 2024 (3 years from the original due date) or he loses that refund forever! But if he OWES money, there's no time limit for the IRS to collect, so he definitely needs to get this sorted. Also, penalties and interest keep accruing the longer he waits to file.

One thing I haven't seen mentioned yet is the holding period requirements for ESPP shares. Based on your dates (acquired 6/15/2018, sold 4/12/2021), you've met the long-term holding period requirements, which is good. If you had sold within 1 year of purchase or within 2 years of the offering date (when your ESPP purchase period began), it would be considered a "disqualifying disposition" which has different tax implications. In that case, you might have had to report additional ordinary income. Since you held the shares for nearly 3 years, you've met both holding period requirements, so you should only need to worry about the cost basis adjustment everyone's talking about. Just make sure you classify it correctly as long-term capital gains on your 8949.

I've been doing my taxes for years and ESPP reporting is consistently one of the most confusing things. Here's a simplified way to think about it that helped me: 1. When you buy ESPP shares at a discount, that discount is considered compensation (essentially like a bonus from your employer) 2. Your employer includes this "bonus" in your W-2 income the year you purchase the shares 3. When you later sell those shares, you need to increase your cost basis by that "bonus" amount to avoid being taxed twice 4. On Form 8949, you list what's on your 1099-B, then use code B to adjust the basis My tax software (FreeTaxUSA) actually has a specific section for ESPP sales that walks through this calculation. I switched to it after TurboTax kept calculating my ESPP sales incorrectly.

One thing nobody mentioned - check if you're having state taxes withheld too! I had the same issue where I owed federal taxes at filing time, but then realized I was ALSO not having any state tax withheld. Double whammy. Make sure your W4 is set correctly for both federal AND state (some states have their own version of the W4).

This is probably gonna sound dumb, but check how many allowances youve put on ur W4. More allowances = less tax taken out during the year = bigger bill at tax time. I kept putting like 3 or 4 allowances (thinking it was like household size??) and kept owing money every April. Finally my payroll person explained that I should put 0 or 1 for my situation. Now I get a refund instead.