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Something important that I don't think has been mentioned: If you sell ESPP shares in a disqualifying disposition, your employer should include the discount (ordinary income portion) on your W-2 for the year of the sale. But some companies miss this! Always double-check your W-2 when you sell ESPP shares. If your employer doesn't report it correctly, you still need to report the ordinary income portion on your tax return (line 7 "Other Income" on Schedule 1). Otherwise, you might get a nasty letter from the IRS later. My company messed this up 2 years in a row and I learned this lesson the hard way.
Wait, seriously?? My company never mentioned anything about this affecting my W-2. I sold some ESPP shares last year in what would definitely be a disqualifying disposition. How can I check if they reported it correctly?
Look at Box 1 (Wages, tips, other compensation) on your W-2. The ordinary income from your ESPP disqualifying disposition should be included there. You can compare this with your final pay stubs - if the W-2 amount is higher than what your pay stubs show, the difference might include your ESPP income. If you're not sure, check with your payroll or benefits department. Ask them specifically how they handle disqualifying dispositions for ESPP shares. Many companies also provide a supplemental statement that breaks down what's included in your W-2. If they didn't include it, you'll need to report it yourself as I mentioned. Better to get this right now than deal with an IRS notice later!
One more thing to consider: state taxes. Depending on your state, the difference between short and long term capital gains rates might be more significant. For example, in California, all capital gains are taxed as ordinary income, so there's no difference between short and long term rates at the state level. But in other states like Massachusetts, there are different rates for short vs long term gains. Might change your calculation a bit depending on where you live.
Also, some states have different rules for recognizing ESPP income! I live in Pennsylvania and they treat the discount as income when you purchase the shares, not when you sell them. Made for a really fun tax situation when I moved between states during my ESPP holding period...
Same thing happened to my cousin with OneClickLife. They quoted him some ridiculously low refund amount. He ended up going to H&R Block instead and got over $800 more. These online services can be sketchy sometimes. Has anyone compared the fee structures? I wonder if OneClickLife is taking a percentage rather than charging a flat fee like most services do.
I used them last year and noticed they had a "processing fee" buried in their terms that was like 25% of the refund amount! Total ripoff. Read the fine print, folks.
For anyone looking for alternatives, I've been using FreeTaxUSA for the past few years and have been really happy with it. Federal filing is free and state is like $15. Super straightforward and they don't try to upsell you on stuff you don't need.
Thanks for the suggestion! I'll check that out. Have you ever had any issues with them calculating returns incorrectly or missing deductions?
I've never had issues with incorrect calculations. They walk you through everything step by step and explain what deductions you qualify for based on your inputs. They also have a comparison feature that shows how your return differs from last year so you can spot any major discrepancies. It's been super reliable for me even when my tax situation got more complex with some freelance work and investments.
I think a key question here is whether your LLC is taxed as a partnership or disregarded entity. If you've been operating as a single-member LLC (disregarded entity) and now adding a partner, the tax treatment changes. The LLC becomes taxed as a partnership going forward, which triggers a "technical termination" of the old entity for tax purposes. When this happens, there's a deemed contribution of assets and liabilities to the new partnership. The reduction in your share of liabilities could potentially be treated as a distribution, but it's not technically "forgiveness of debt" in the traditional sense.
Does that technical termination trigger immediate tax consequences? I'm planning to do something similar with my vacation rental LLC.
The technical termination doesn't necessarily trigger immediate negative tax consequences. What happens is the LLC converts from a disregarded entity to a partnership for tax purposes. You're essentially deemed to have contributed your 50% of the assets and liabilities to a new partnership entity. For vacation rental LLCs specifically, you'll need to consider how depreciation will be handled going forward. The property doesn't get a new depreciation schedule - the new partnership continues with the existing depreciation schedule, but now it's split between two partners. Also be aware that any state transfer taxes might apply when converting entity types, depending on your state's rules.
Don't forget to update your operating agreement! When I sold half of my LLC that owned investment properties, I was so focused on the tax implications that I nearly overlooked updating the operating agreement to reflect the new ownership structure. This is especially important when dealing with debt because you want clarity on who's responsible for what if things go south.
This is really good advice. My buddy didn't properly update his operating agreement when bringing in partners to his equipment leasing LLC, and when one partner wanted out two years later, it was a complete mess figuring out how to handle the debt obligations. Led to a lawsuit that cost way more than what a proper agreement would have cost.
Just want to add some context about international inheritance. If your uncle is a US citizen, he's required to report worldwide income and assets regardless of where he lives. The Foreign Bank Account Report (FBAR) requirements might also apply if he has financial accounts outside the US that exceed $10,000. Also, South Korea has its own inheritance tax which can be quite high (up to 50% for large inheritances). If he's avoiding taxes in both countries, that's a serious issue. If you decide to file Form 3949-A, focus on factual information about the unreported inheritance, estimated values, and timeline. The IRS is interested in the tax implications, not the family dispute aspects.
Thanks for this insight! Do you know if the IRS typically shares information with tax authorities in other countries? Like would they notify South Korean tax authorities if they find evidence of tax evasion related to property there?
Yes, the IRS does share information with many foreign tax authorities through tax treaties and information exchange agreements. The US and South Korea have a tax treaty that includes provisions for sharing tax information. If the IRS investigates and finds evidence of tax evasion involving South Korean properties, they may very well share that information with South Korean authorities. This is especially true for larger cases where significant tax revenue is at stake. Many countries have become much more cooperative in recent years to combat international tax evasion.
Don't forget that filing Form 3949-A is confidential, but not anonymous if you want to be eligible for a potential whistleblower award. If your info leads to collection of unpaid taxes, you might be eligible for a percentage. But be prepared for family fallout if they ever find out you reported them. I reported my brother-in-law years ago for not reporting a huge inheritance from his grandfather's estate in Italy, and while the IRS did follow up, our family hasn't spoken since.
Oliver Schulz
Just want to add, if you do get the Wage and Income Transcript from the IRS, be aware that it won't show your state tax withholding! I made this mistake last year and had to go back and amend my state return. Make sure you still try to get the actual W2 copies from your employers for complete state tax information.
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Natasha Kuznetsova
β’This is so important! I got hit with state penalties because I filed using only the IRS transcript info and underreported my state withholding. Ended up having to prove my actual withholding amounts later with paystubs. Huge headache.
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AstroAdventurer
One more option - check your email! I thought I lost my W2s from 2022 but then remembered my company had sent them electronically. Found them buried in my email from January/February 2023. Worth searching your inbox for "W2" or "tax document" just in case!
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