This doesn't sound right. Isn't it more about who the child lives with and who provides support? I'm pretty sure the IRS has specific residency tests that don't require legal adoption or guardianship.

I think I might have been wrong or my tax preparer was confused. I just looked it up on the IRS website, and you're right - the main test is about residency and support, not legal guardianship for the qualifying child test. The child needs to have lived with you for more than half the year and you need to provide more than half their support. There's also a relationship test, but it includes any child who lived with you in a parent-child relationship. Legal adoption or guardianship would make things clearer, but they're not strictly required if you meet the other tests. Sorry for the confusion! This is why I usually pay someone to do my taxes.

What tax software did you use that allowed you to claim a non-bio kid? I tried with TurboTax and it kept asking for adoption documentation or court papers.

I used H&R Block's online software. When it asked about the relationship, I selected "other eligible dependent" rather than "son/daughter" and then it walked me through the qualifying child tests. It asked if the child lived with me for more than half the year and if I provided more than half the support, both of which were true in my case. TurboTax should have a similar option. You might have been going down the wrong path in their question tree if it was asking for adoption papers. Try looking for the option about qualifying dependents rather than specifically entering the child as your son/daughter. The relationship test includes any child who lived with you in a parent-child relationship.

Good point about state fees! Also, does anyone know if you can change your mind later? Like if we start as a partnership, can we convert to S Corp next year if we decide that's better?

Yes, you can absolutely change later. Many businesses start as partnerships for simplicity, then convert to S Corps when their profits justify it. The conversion is straightforward - you file Form 8832 to elect to be taxed as a corporation, then Form 2553 to elect S Corp status. Just be aware there are timing requirements. Generally, if you want S Corp status for a particular tax year, you need to file within the first 2.5 months of that year (or within 75 days of forming your business if it's a new entity).

This is what tipped our decision for our handyman business. We needed to buy a lot of equipment the first two years, so we stayed as partnership. Year three we switched to S Corp once we were taking home steady money. Saved about $6k in SE taxes last year alone!

Thank you so much for sharing your expertise! This confirms my suspicions. Would it raise any audit flags if we've submitted Form 4562 for many years and suddenly stop, even though we're still claiming depreciation on the same equipment?

Yes, it could potentially raise questions during a review or audit. Consistency in filing practices is something that the IRS looks at. When a business suddenly changes how they're reporting long-standing deductions, it can trigger closer examination. More importantly, Form 4562 provides the detailed documentation of your depreciation calculations. Without it, in the event of an audit, you'd need to provide alternative, equally detailed records showing how you arrived at the depreciation amounts claimed on your return. Having the form as part of your filed return establishes a clear record of your depreciation methodology.

I tried using the IRS interactive tools for my small business and found them frustratingly limited. They're okay for basic questions but not great for specific form requirements for business scenarios. For something like Form 4562, you'd be better off reading the actual form instructions directly from the IRS website.

What percentage should married couples have withheld? We both put "married" on our W-4s but still ended up owing this year.

There's no one perfect percentage that works for everyone, but for married couples with two incomes, a common issue is that both of you are having taxes withheld at the married rate, which assumes the other spouse doesn't work. If both of you select "Married" on your W-4 without any adjustments, you're essentially both claiming the full married tax bracket benefit, which results in underwithholding. In 2025, you should either select "Married, but withhold at higher Single rate" on your W-4s, or use the Two-Earners/Multiple Jobs worksheet (or your company's payroll system calculator) to determine the additional amount to withhold per paycheck.

Yes! This is the simplest solution. I use TurboTax and it lets you compare both filing statuses side by side to see which saves you more. MFS was worse for us by about $3k.

This! I switched to an S-Corp last year and it saved me about $4k in self-employment taxes. Just make sure your salary is "reasonable" for your industry or the IRS might get suspicious. Also, you'll need to run actual payroll which adds some complexity and costs.

That's exactly right. The key is finding the sweet spot where the tax savings outweigh the additional costs and complexity. For my web development business, I waited until I was consistently making about $60k before making the switch. The "reasonable salary" part is crucial - you can't just pay yourself $1 and take everything else as distributions. I researched industry standards for my area and skill level, then documented why my salary was reasonable. Having this documentation is important if you're ever questioned. Also worth mentioning that with an S-Corp, you'll need to separate your personal and business finances completely, run payroll (usually through a service), and file more complex tax returns. There's software that helps with this, but it's definitely more work than a sole proprietorship.

I vaguely remember seeing something about this when I was researching, but wasn't sure if it applied to me since my income is relatively low. Does it work for all self-employed people or are there specific requirements? How complicated is it to calculate?