The 65-day rule is huge. So many preparers don't realize you can make distributions up to 65 days after year-end and elect to treat them as made in the prior tax year. Great planning opportunity if the trust has high income.

This is such practical advice - thank you! I've never thought about using the IRS audit guides as learning tools. Do you think starting with those might help me identify my knowledge gaps more effectively than just trying to read the code?

Absolutely! The audit guides are written in much more accessible language than the code and regulations. They focus on practical application rather than technical language. Plus, they highlight the areas where mistakes commonly occur, which helps you prioritize what to learn. The partnership ATG specifically has great examples of what proper allocations, basis calculations, and distributions should look like. It also explains the economic substance doctrine in a way that's much clearer than most textbooks. Just remember that they're written from an enforcement perspective, so they emphasize areas of non-compliance rather than planning opportunities.

That's a good point! I should double-check the exact amount on the 1099-NEC they're referencing in the notice against what we have. Is there a way to get a transcript of what was reported to the IRS directly from them?

Yes, you can request a "Wage and Income Transcript" directly from the IRS which will show exactly what was reported to them on your behalf! You can get this online through the IRS website by creating an account at irs.gov/transcripts or by filing Form 4506-T. This is super helpful because it shows the exact amounts that were reported to the IRS by third parties (employers, banks, clients, etc). That way you can see if what you have matches what they have. In my sister's case, her client had submitted a higher amount to the IRS than what was on the copy they gave her.

Omg this happened to me too! Spent weeks trying to figure out why the IRS said I underreported when I knew I included everything. Turned out the payment processor filled both boxes with the same amount, essentially reporting my income twice. Such a headache to fix.

Thanks so much for mentioning this! My wife's business is actually still in the investment phase and will probably show a small loss for 2024. I didn't even think about how that might offset my W2 income if we file jointly. Do you know if there are any limits to how much business loss can offset regular income? And yes, we'll definitely claim the Child Tax Credit!

There are some limits, but they probably won't affect you. The business loss can generally offset your other income, but if the loss is very large (over $270,000 for married filing jointly in 2024), it might be subject to the excess business loss limitation. For most small businesses with moderate losses, you can use the full amount of the loss to offset your W2 income. This is a huge advantage of filing jointly - if you filed separately, your wife's business loss could only offset her income, not yours.

Yeah but S-Corps come with their own headaches. You have to run payroll, file more complicated returns, etc. I wouldn't recommend it until the business is making at least $40k in profit.

But wait - I thought Roth contributions were tax deductible? Are you saying they're not?

You're confusing Roth contributions with traditional retirement contributions. Roth contributions (which is what code AA represents) are made with after-tax money, meaning you pay tax on that income now. The benefit is that when you withdraw the money in retirement, including all the growth, it comes out tax-free. Traditional 401(k) contributions (which would be code D in Box 12) are tax-deductible now, but you pay taxes when you withdraw the money in retirement.

For the AA codes (Roth 401k contributions), the amount is already INCLUDED in your Box 1 wages because Roth contributions are made with after-tax dollars. If you had traditional 401k contributions (which would be code D in Box 12), those would already be EXCLUDED from your Box 1 wages because they're pre-tax. You don't need to make any adjustments either way - the Box 1 amount is already correct.

Thank you! That makes sense. So basically the Box 1 amount is what I should be using for my tax return, and all these codes in Box 12 are just additional information that I don't need to do anything with.

Wait, so I'm already in trouble for not paying quarterly taxes this past year? Will I get penalties? How do I even figure out how much I was supposed to pay each quarter?

Yes, you may face penalties for not making quarterly payments. The IRS calls these "failure to pay estimated tax" penalties. The penalty rate is currently around 3-4% of what you should have paid. To figure out what you should have paid, you generally need to pay either 90% of this year's tax or 100% of last year's tax (110% if your income was over $150,000) divided into four equal payments. For a first-time 1099 earner, this is tricky since you don't have a previous year of self-employment to reference. Moving forward, use Form 1040-ES to calculate your quarterly payments for the new tax year.

Be careful with deducting "every coffee you buy when working." That's not how it works. Regular coffee while you're working at home isn't deductible - that's just personal consumption. You can only deduct meals when you're traveling for business or having a business meeting with a client or potential client, and even then it's only 50% deductible in most cases.