Thank you for mentioning this! My fictional taxpayer has an AGI of $123,000, so they'd be in that phaseout range. How exactly do I calculate the deductible portion of the $7,500 rental loss in this case? Is there a specific worksheet in the instructions?

For an AGI of $123,000, you're right in the middle of the phaseout range. The calculation is pretty straightforward: you lose $0.50 of the $25,000 maximum deduction for every $1 over $100,000. So take $123,000 - $100,000 = $23,000 over the threshold. Multiply that by 0.5 = $11,500 reduction. This means your maximum deduction would be $25,000 - $11,500 = $13,500. Since your loss is only $7,500, you can deduct the entire amount because it's less than your modified maximum. Form 8582 is where you'd calculate this for a real return, but for your assignment, just showing this calculation should be sufficient unless your professor specifically required Form 8582 as part of the project.

Our professor had us use the free fillable PDFs from the IRS website for older tax years. Way less headache than dealing with outdated software! You can still download the 2017 forms and instructions directly from irs.gov/prior-year

1 I hadn't even considered the self-employment tax! That's a really good point. If I go the self-employed route, I'd be paying 15.3% on the profit after expenses. But if I go the hobby route, I'd pay regular income tax on the full $160 without being able to deduct the $125 developer fee. Let me see... If I file as self-employed, my profit would be $160 - $125 = $35, and I'd pay 15.3% on that plus my regular income tax rate. If I file as a hobby, I'd pay just my regular income tax on the full $160. Hmm, this actually makes the hobby route seem better financially in my case. I need to calculate this more precisely. Thanks for pointing this out!

14 You're welcome! That's exactly the kind of calculation you should be doing. Just to add one more thing: remember that with self-employment, you can deduct half of the self-employment tax from your income. That helps a little. Also, if you think your app income might grow in the future, establishing it as a business now could be beneficial long-term, especially for building retirement savings through a SEP IRA or solo 401(k) once the income justifies it. Just something to keep in mind if you see potential for this to grow beyond covering just the developer fee.

19 I used TurboTax for my Etsy shop income last year (about $500). It handled both options fine, but I found the questions for the Schedule C to be easier to follow than trying to figure out where to put hobby income. They walk you through the business vs. hobby test and help you choose which approach makes sense.

7 Thanks for sharing your experience! That's helpful to know. I'll probably stick with TurboTax then since I'm already familiar with it. Did you end up classifying your Etsy income as business or hobby?

Do you remember approximately how long it took for the IRS to process your e-filed 1040-X through FreeTaxUSA? I've heard horror stories about paper amendments taking 6+ months, wondering if e-filing is significantly faster.

It took about 7 weeks from submission to getting my refund, which was significantly faster than paper filing. The IRS sent an acknowledgment of receipt within 2 days of e-filing, which gave me peace of mind that they actually had my amendment. From what I've heard, paper amendments are taking 6-12 months right now, so e-filing is definitely the way to go if you qualify. Just make sure your changes are for forms that support e-filing - not all schedules can be e-filed for amendments even now.

Actually this isn't always true. If you've had tax payments applied to the year in question after filing (like estimated tax payments that were applied forward or carryforwards from other years), the deadline can be extended to 2 years from the date of the last payment rather than 3 years from filing. Worth checking if this applies to your situation OP.

Quick question - does filing an extension for your original return extend the amendment deadline too? Like if someone filed a 2019 extension until October 2020, would they have until October 2023 to amend?

Does FreeTaxUSA handle state taxes too? And is it easy to import previous year's info if you're switching from TurboTax?

FreeTaxUSA does handle state taxes, though unlike federal (which is free), there's a small fee for state filing - around $15 depending on your state. Way cheaper than TurboTax's $50+ for state filing. As for importing from TurboTax, unfortunately, you can't directly import the TurboTax file. You'll need to manually enter your information the first year. However, it's not as bad as it sounds since you can use your previous year's return as a guide. After that first year, FreeTaxUSA will remember your info and make future years much easier.

What deductions are people commonly missing with rental properties? I always worry I'm leaving money on the table even with TurboTax.

I've never heard of Form 911 or the Taxpayer Advocate Service. Is this something anyone can use? And how long does it typically take to get a response from them?

Yes, anyone can request help from the Taxpayer Advocate Service, though they prioritize cases where taxpayers are experiencing financial hardship, immediate threats of adverse action, or situations where they've tried normal IRS channels without success - which definitely applies to your case. Response times vary greatly depending on their caseload and the complexity of your situation. Currently they're taking about 4-6 weeks for initial response, but they can place holds on collections while they investigate. The best part is you'll get assigned a specific advocate who handles your case personally, so you're not explaining your situation to a different person every time. You can find the form and contact information on the IRS website by searching "Taxpayer Advocate Service.

This is actually a good point. I once had a similar issue and it turned out a former employer had submitted a corrected W-2 that showed $2k more income than the original one I received. I never got the corrected copy but the IRS did! Worth checking your wage and income transcript too.