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Negative income on Schedule E but $10,000 increase in taxes? How is this even possible?
My father-in-law is absolutely furious with me right now. I helped put together a Schedule E for his rental properties that showed a loss, and he's claiming his taxes shot up by $10,000 after his accountant included it. He makes good money (like 7 figures good) if that matters. The Schedule E I prepared showed -$7,945 on line 26 after accounting for depreciation and everything else. Total rental income was about $78,500. Total expenses hit around $94,300 on line 20 (one property needed nearly $25,000 in repairs/maintenance which really hurt us). Can someone please explain how giving him a form that shows NEGATIVE income could possibly increase his taxes by that much? I'm so confused and he's blaming me for this massive tax bill increase. His accountant hasn't given a clear explanation yet, but I need some kind of sanity check. Does this make any sense to anyone??
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Trying to understand GILTI tax for my foreign business - how to determine shareholder type?
I'm a US citizen living in South Korea with a business here that I own 100% directly. I've been trying to wrap my head around this GILTI tax thing and I'm completely lost. From what I understand, GILTI applies to retained earnings in my foreign business, but the tax implications depend on whether I'm considered a corporate or individual shareholder. How do I figure out which category I fall into? Since I personally own the business directly (not through another entity), I'm guessing I'd be considered an individual shareholder, but I want to make sure. Let's say GILTI works out to be around $55,000 this year. Would I need to include this amount on my personal tax return along with my salary (about $27,000) from the business? And here's where I'm really confused - would the Foreign Earned Income Exclusion still apply in this situation? Would it cover just my salary or could it also apply to the GILTI amount? Any help understanding this would be hugely appreciated. The more I read about GILTI, the more confused I get!
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I'm still confused about the difference between Subpart F income and GILTI. My foreign corporation in Thailand has mostly service income. Would this fall under GILTI or Subpart F? I keep getting mixed messages from different accountants.
Generally, service income from foreign corporations doesn't automatically trigger Subpart F unless it meets specific criteria (like services performed for a related party or services performed outside the country of incorporation). If your service income doesn't meet the Subpart F criteria, then any retained earnings would potentially be subject to GILTI.
PSA for anyone dealing with GILTI: don't forget about the high-tax exception! If your foreign income is already taxed at more than 18.9% (90% of the current 21% US corporate rate), you might be able to exclude that income from GILTI. Saved me a ton on my Singapore business where corporate rate is 17% but with some local surtaxes it pushed me over the threshold.
Filed Gift Tax Extension Form 8892 But Realized I Don't Need to File Form 709 After All
Title: Filed Gift Tax Extension Form 8892 But Realized I Don't Need to File Form 709 After All 1 Back in February, I panicked and submitted Form 8892 to get an extension for filing the gift tax Form 709. I was worried because I had helped my three adult children with down payments on their homes last year, totaling about $45,000 per child. Now that I've sat down to actually complete the Form 709, I'm realizing that since I gave each child less than the annual exclusion amount ($17,000 per person for 2023), I don't actually need to file anything at all. My question is: since the IRS received my extension request Form 8892, will they be flagging my account expecting a Form 709 submission? Will I run into problems if I just don't file anything now that I know I don't need to? I'm worried about getting some kind of notice or penalty for "failing to file" even though there's technically nothing I need to file. Any insights would be much appreciated! This is my first time dealing with gift tax issues and I'm pretty confused.
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22 Just a heads up - while it's true you don't need to file if your gifts are under the annual exclusion, make sure you're calculating everything correctly. Did you give any other gifts to these same people during the year? Cash, paying bills directly, or adding someone to property deeds all count. Also, if you're married, you and your spouse can split gifts (effectively doubling the exclusion amount) but you DO need to file Form 709 to elect gift splitting even if you don't owe any tax.
1 Thanks for this additional info! The only gifts I gave were those three payments for my kids' down payments. I'm widowed, so no spouse to worry about for gift splitting. I definitely didn't exceed $17,000 per person - each payment was exactly $15,000 since that was the exclusion limit I remembered from a few years ago (before it increased).
22 You're all set then! The annual exclusion was $15,000 for 2018-2021, then increased to $16,000 for 2022, and $17,000 for 2023. Since your gifts were $15,000 each, you're well under the threshold even for 2022. And being widowed means you don't need to worry about the gift-splitting election. Just keep good records of these gifts for your own files - dates, amounts, and recipients. This can be helpful in case questions ever arise in the future, but you definitely don't need to file Form 709.
5 Somewhat related question - if I did need to file Form 709 but had already filed an extension with Form 8892, when would the new deadline be? Is it October 15th like regular income tax extensions?
19 Gift tax extensions work differently than income tax extensions. Form 8892 extends the deadline to October 15th, but only if you also filed an extension for your income tax return (Form 1040). If you didn't extend your 1040, the 709 extension only goes to April 15th plus 6 months, which would also be October 15th. So either way, October 15th would be your deadline.
W2 employee told not to report tips to salon employer - is this legal?
So I'm kinda confused about this situation with my wife's new job. She just started at SuperCuts about a month ago and something weird is happening with how they handle tips. Her manager specifically told her NOT to report any tips to the company, but instead just "deal with it at tax time" when we file our return. Neither of us has worked in a tipped position before, so we have no clue if this is normal or shady. Her paystubs only show her hourly wage ($15.75/hr) and nothing about the tips she's getting. She gets both cash tips and credit card tips that she takes home each day. The credit card tips are especially confusing to me because doesn't the salon already have records of those? She's bringing home anywhere from $40-90 extra per day in tips that aren't being tracked anywhere official. I'm worried we're going to get screwed at tax time or get in trouble with the IRS. Isn't her employer supposed to be withholding taxes on reported tips? This whole "just handle it yourself later" approach seems fishy to me. Any advice from people who understand how tip reporting is supposed to work?
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Former salon manager here. What your wife's employer is doing is unfortunately common practice in some salons, but it's definitely not right. Here's why they're doing it: when tips are properly reported, the business has to pay the employer portion of Social Security and Medicare taxes on those tips. By telling employees to "handle it themselves," they're avoiding these costs. For credit card tips specifically, this is extremely sketchy because there's already a paper trail. The IRS can easily see that the business processed credit card tips but didn't report them properly on W-2s. Your wife should absolutely keep her own detailed records of ALL tips received, noting which were cash and which were credit card. This will protect her if there's ever an audit.
Is there a way to report this kind of behavior anonymously? My salon does the same thing and I'm worried about taxes but don't want to lose my job for causing problems.
Yes, you can report tax compliance issues anonymously using IRS Form 3949-A (Information Referral). You can submit this form without providing your personal information, and the IRS is prohibited from disclosing the source of their information during an investigation. That said, if you're the only employee suddenly concerned about tip reporting, it might be obvious who made the report. Some employees choose to first approach the situation by simply saying they need proper tip reporting for mortgage application purposes or similar financial reasons - this sometimes can change the employer's approach without creating conflict.
Just want to add - check your state laws too! Some states have additional requirements for tip reporting and minimum wage calculations for tipped employees. In my state, employers who take a tip credit have to provide written notification to employees about tip reporting procedures. Also, if your wife is getting health insurance or other benefits through this job, unreported income could affect her qualification or subsidy amounts if she's getting coverage through the ACA marketplace. It really can create a cascade of problems beyond just the IRS issues others mentioned.
This is a really good point! When I was reporting tips incorrectly, it messed up my income verification for an apartment rental application. The landlord wanted proof of income and my paystubs showed way less than I actually made. Created a huge headache and almost lost the apartment.
My company reported incorrect taxable wages to IRS - got CP2501 notice!
I just got hit with a CP2501 notice claiming there's a huge discrepancy between what I reported on my tax return and what was reported to the IRS by third parties (my employer). Looking at the notice, there are multiple issues. For my taxable wages, my income appears to be listed TWICE, essentially doubling what I actually made. Plus there's a third entry with some random amount I don't recognize at all. The IRS thinks I'm hiding a small fortune in unreported income! Even worse, for federal tax withholding, the notice claims I didn't report ANY withholdings, which is absolutely not true. I definitely included that on my return. One of the entries shows the correct amount from my W-2, but there's another withholding amount that seems completely unfamiliar. My theory is that my company somehow reported another employee's salary and tax withholding under my SSN, while also accidentally doubling my actual wages. I do receive RSUs from my company but those are all included in my W-2 earnings already. Has anyone dealt with something like this before? I'm planning to talk to a CPA, but would appreciate hearing if others have experienced similar issues with CP2501 notices due to employer reporting errors.
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Contact your payroll department immediately! This happened to me in 2023, and it was because my company's payroll system had a glitch that caused duplicate reporting for about 50 employees. If multiple people at your company are affected, the IRS might already be aware of a systematic error. My company had to issue corrected W-2c forms to everyone affected and file corrections with the IRS. Keep records of EVERYTHING - emails with payroll, copies of your original W-2, pay stubs, etc. The more documentation you have showing the correct amounts, the easier this will be to resolve.
Thanks for this advice. I reached out to our payroll department yesterday and they're "looking into it." Did your company initially deny there was an issue? I'm getting some resistance from our HR coordinator who keeps insisting their reporting was correct.
Yes, at first they denied anything was wrong! It took about two weeks of me and other affected coworkers persistently following up before they finally investigated properly. Their initial response was "our system doesn't make mistakes" but clearly it did. Ask if anyone else in the company received similar notices - that was what finally got them to take it seriously when they realized multiple people were affected. If possible, get a copy of your "Last Pay Statement" for the tax year in question - this should show your year-to-date earnings and withholdings that should match your W-2.
Don't let this slide or procrastinate on it! My brother ignored a CP2501 thinking it was just a minor discrepancy, and it escalated to a CP3219A notice of deficiency. Once that happens, your options become much more limited. The IRS gives you 30 days to respond to a CP2501. Make sure you meet that deadline even if you're still gathering information. You can write them explaining you're working with your employer to resolve the reporting error and request additional time.
What happens if you miss the 30 day deadline? My notice arrived when I was traveling for work and I just opened it yesterday. The response due date is in 5 days!
Ayla Kumar
I'm a landlord who got hit with this exact same issue. The key is understanding the difference between non-passive and passive income. Your father-in-law's salary/business income is non-passive, while rental income is considered passive (unless he qualifies as a real estate professional). The tax code only allows you to offset passive losses against passive income unless you meet specific exceptions. For high earners (over $150k), those exceptions get phased out completely. Here's the really frustrating part - the losses don't disappear forever. They get suspended and carried forward until either: 1) He has passive income to offset them against, or 2) He sells the property. So he's still getting dinged with higher taxes now even though these are legitimate expenses.
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Lorenzo McCormick
So what's the point of even owning rental properties if you're a high earner? Sounds like the tax benefits are completely eliminated.
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Ayla Kumar
There are still significant advantages to owning rental properties as a high earner. First, you're building equity as tenants pay down your mortgage. Second, you benefit from property appreciation over time. Third, you can still deduct expenses up to the amount of rental income (preventing tax on phantom income). Most importantly, those suspended losses aren't gone forever - they're carried forward indefinitely. When you eventually sell the property, all those accumulated losses can be used to offset the gain from the sale. Many investors also deliberately generate passive income from other sources (like REITs or certain business activities) specifically to absorb these carried-forward losses. The key is long-term tax planning rather than focusing on year-to-year deductions.
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Carmella Popescu
Has your father-in-law done any grouping elections for his properties? My CPA had me file a statement with my return to group all my rental activities as a single activity for passive loss purposes. This doesn't get around the income limitations, but it can help if some properties make money while others lose money.
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Kai Santiago
I second this recommendation. Grouping the properties helped me a ton because my commercial property had positive income while my residential rentals were showing losses after depreciation. Without grouping, I couldn't use the losses from one against the gains from another.
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