That's really helpful info! Did she have to go through multiple appeals or did they accept everything after the first detailed submission with the Form 8862?

It took two submissions. The first one was rejected with a form letter, but she called (after struggling to get through) and spoke with an agent who advised her to resubmit with even more documentation and a more detailed timeline of the birth certificate delays. The second submission included everything from the first plus school enrollment records, health insurance coverage documentation, and a more detailed letter citing specific sections of the tax code related to qualifying children. That one was finally approved, though it took about 4 months to process.

I second this! The Taxpayer Advocate Service helped me resolve a much simpler issue when regular IRS channels were going nowhere. They're specifically designed to help with situations where the standard process isn't working due to special circumstances.

What happened with your audit? Did you end up having to pay back taxes plus penalties? I'm considering a similar strategy but worried about the consequences if it doesn't work out.

The audit was brutal. They disallowed about 70% of my claimed business expenses, including most of the vehicle depreciation, because my documentation wasn't sufficient to prove predominant business use. I had to pay back taxes, interest, and a 20% accuracy-related penalty. The biggest issue was that I couldn't demonstrate I was spending enough time in real estate activities to justify such a large vehicle expense, especially given my full-time medical practice. The IRS agent specifically noted that my income level made the large loss suspicious. They applied the hobby loss rules and reclassified much of my activity as passive. The total hit was around $45,000 including professional fees for representation during the audit.

Opportunity zones are interesting but completely different from what OP is asking about. 1031 exchanges defer capital gains on property sales, while opportunity zones provide capital gains tax reductions. Neither helps reduce taxes on current W2 income like OP wants.

How do you figure out what percentage to save for quarterly payments? I do Instacart and have been just guessing and usually end up owing at tax time anyway.

I started with 30% as a safe estimate (covers both income tax and self-employment tax for most people). Then after filing my first full year of taxes with gig work, I calculated my effective tax rate on just the 1099 income. For me personally, it worked out to about 27% when considering federal, state, and self-employment taxes. But this varies based on your total income, tax bracket, deductions, and which state you live in. If you're eligible for a lot of deductions (like mileage for Instacart), you might need to set aside less.

That's a good point - my company did actually change their payroll system around October last year! I just checked my final paystub from 2023 and compared it to my 2022 W-2, and it looks like they withheld about $2,800 more in 2023 than in 2022, even though my salary only went up by about $4,000. That explains a lot!

This is really helpful! We have a basic operating agreement drafted but haven't addressed the profit/loss allocation part in detail. Would you recommend getting a specialized business attorney to help with this, or are there good templates we could use as a starting point?

I would absolutely recommend getting a specialized business attorney for this. Templates are a starting point, but with four partners and potentially complex profit-sharing arrangements, you need customization. The attorney cost us about $1,500 for a solid operating agreement, but it was worth every penny. For your escape room business, you'll want specific provisions that address how to handle capital-intensive improvements, marketing expenses, and the sweat equity some partners might contribute versus purely financial investments. The attorney can also help structure things to maximize the tax benefits whether you go MMLLC or S-corp route. Think of it as insurance against future partner disputes.

Does QuickBooks handle the S-corp payroll stuff well? We're starting a similar business and I'm worried about getting the whole "reasonable compensation" thing right.

We got a bunch of papers from the insurance company but honestly we were so overwhelmed with grief and funeral arrangements I don't remember a 1099. We just saw the check and deposit instructions. Maybe we missed something important! Actually think I still have the folder with all the insurance papers. Going to dig through it tonight. Do you know if it would specifically say "1099" or could it be called something else?

It would definitely say 1099 on it, but could be different types like 1099-R (for retirement distributions), 1099-INT (for interest), or even 1099-MISC. Look for any form with numbers broken down into different boxes or categories. Also check if the policy had what's called a "Modified Endowment Contract" or MEC status. These are life insurance policies that have been funded with more money than tax law allows, which changes how they're taxed. If the policy was a MEC, then part of the payout could definitely be taxable.

I'm not OP but have a similar situation. If the policy was whole life and the death benefit was $200K but only $150K was the actual insurance (with $50K being cash value that built up), is only that $50K taxable? Or is it more complicated?

Not to hijack this thread, but what about if someone cashes out a life insurance policy before death? My uncle is considering this with his policy and I'm trying to help him understand the tax implications.