If I do go to a CPA, what documents should I bring with me? I want to be prepared so I don't have to keep going back with more paperwork.

Bring the deed showing when you were added to the title, the closing documents from the sale, any documentation showing improvements made to the home that might affect basis, and anything showing the original purchase price when your father bought it. For the retirement accounts, bring all 1099-R forms, statements showing the withdrawals and deposits, and documentation from both the old and new retirement plan administrators. Also bring your last year's tax return and any correspondence you've had with the IRS. If you have documentation of any hardship that led to the withdrawals, that could be helpful too as it might qualify you for penalty exceptions.

Do they also need to worry about the Section 121 exclusion for primary residence? If they lived in the house for 2 of the last 5 years, couldn't they exclude some of the gain?

Does putting a rental property in an LLC actually save on taxes though? I thought LLCs are pass-through entities so the tax treatment is the same as individual ownership? Also doesn't it make the mortgage situation more complicated?

You're right that a single-member LLC is typically a pass-through entity and doesn't change the tax treatment by itself. I should have been more clear. The tax savings come from strategies you can implement once you have the proper structure in place, not just from having an LLC. The real benefits come when you combine the LLC with proper tax planning like implementing a management company structure or potentially electing S-corp taxation for your activities depending on your situation. And yes, transferring mortgaged properties into an LLC can trigger due-on-sale clauses in some cases, so that's exactly why I recommended consulting with both tax and legal professionals before making any moves.

What app do you use for storing receipts? I've been trying to find a good one that will organize by property and expense type.

This is super helpful, thank you! Is it worth trying to handle the initial appeal myself to save on costs, or is that risky? I'm worried about saying something that might hurt my case later.

It depends on your comfort level with tax matters and how complex your situation is. For simple factual disputes where you have clear documentation, you might be able to handle the initial response yourself. However, if there are complex legal interpretations at play or if your business structure has nuances, professional help is advised. The biggest risk of handling it yourself is inadvertently making statements that limit your options later or missing technical arguments that could help your case. If you do go it alone for the initial response, be very careful to stick to provable facts and avoid making legal conclusions or interpretations of tax law.

I paid $3,500 for my tax attorney last year for an appeal similar to what OP is describing. It was a flat fee that covered everything unless it went to Tax Court (which it didn't). Some attorneys charge hourly ($350-500/hr where I live) which can add up fast. Ask for a flat fee if possible!

This is really helpful, thank you. Do you know if there's a limit on the amount of books/supplies that can count toward the American Opportunity Credit? I spent about $1,800 on books and another $1,200 on my laptop.

The American Opportunity Credit is calculated as 100% of the first $2,000 in qualified expenses, then 25% of the next $2,000 - for a maximum credit of $2,500. Your $3,000 in expenses would qualify for the full first $2,000 plus 25% of the remaining $1,000, so $2,250 total credit. Remember that the expenses must be required for enrollment in your courses, which books typically are. For the laptop, you'll need to determine if it was required for your specific program of study or just convenient. If your courses required specific software or computing capabilities, you've got a stronger case for including it.

This is great advice. My university's VITA program actually helped me file for hardship consideration with the IRS too. They had specific experience with scholarship tax issues since they see it every year with students.

Thanks for mentioning this! I had no idea about the self-employment tax being that high. Do I get any credit for the social security/medicare taxes I'm already paying through my W2 job? And for the mileage deduction, does driving to client meetings count?

There's a cap on Social Security tax (not Medicare) - if your W2 job already withholds the max Social Security tax ($9,932 for 2023, which happens at $160,200 of income), then you won't owe additional Social Security tax on your freelance income, just the Medicare portion. Driving to client meetings absolutely counts as deductible business mileage! Keep a log with dates, starting/ending mileage, and purpose of each trip. Commuting to a regular workplace isn't deductible, but since your freelance clients aren't a regular workplace, those trips qualify. You can also deduct trips to buy business supplies, attend work-related conferences, etc.

This is the best advice! I started doing this last year and it's been amazing for keeping things organized. I also set up a separate checking account for all my freelance income. My accountant was super impressed with how clean my books were.