Can you explain more about these phase-outs? I've heard about QBI but my accountant said I probably can't use it because of my income level (around $225k).

The phase-outs start at $170,050 for single filers and $340,100 for joint filers (for 2022 tax year, slightly higher for 2023). Above those thresholds, the deduction starts to phase out for specified service businesses (legal, health, consulting, financial services, etc.). For non-service businesses, instead of phasing out completely, the deduction becomes limited based on W-2 wages paid and qualified property. This is where it gets tricky - sometimes paying yourself MORE in W-2 wages actually increases your QBI deduction if you're over the threshold. That's why personalized analysis is so important.

If you have an S-Corp, health insurance premiums paid for a >2% shareholder (which you would be) must be reported as income on your W-2, but then you get to deduct them on your personal return. It's a wash tax-wise, but requires the proper paperwork. For an LLC taxed as a sole proprietorship, you can take the self-employed health insurance deduction directly on your personal return without running it through payroll.

Thanks for raising this point! My divorce was finalized in 2017, so I'm still under the old rules where alimony is taxable income to me and deductible for my ex. That's why I need to figure out the correct year to report it.

Got it! Since you're under the pre-2019 rules, then yes, constructive receipt applies and the experts above are correct - it's 2023 income for you since you received and deposited the check in 2023, regardless of when the funds became available. Just make sure your ex is also treating it as a 2023 payment on their return to avoid any IRS matching issues.

But what if the bank hold was because of insufficient funds in the payer's account? That seems different from a standard hold.

Thank you for this breakdown! I think I'm confused about the self-employment tax part. So even though my profit is below the standard deduction, I still have to pay the 15.3% on my $7k business income? That would explain a lot of the tax bill I'm seeing.

Yes, that's exactly right! This is the part that surprises many small business owners. The standard deduction ($12,950 for single filers in 2022, higher for 2023) only applies to income tax, not self-employment tax. Self-employment tax (which covers Social Security and Medicare) applies to net business income over $400, regardless of your other income or filing status. So with $7,000 in profit, you would owe self-employment tax on that amount (approximately $989 at the 15.3% rate) even if you owe zero income tax due to the standard deduction.

While S-Corp status can potentially save on self-employment taxes for higher-income businesses, it's generally not cost-effective at the $7-10k profit level the original poster mentioned. S-Corps require more administrative overhead, including: 1) Running payroll (with associated costs) 2) Filing separate corporate tax returns 3) Potentially higher tax preparation fees 4) More complex accounting requirements At lower income levels, the payroll costs and additional tax preparation fees often exceed any SE tax savings. Generally, S-Corp status becomes more beneficial when business profits reach $40k+ annually, depending on your specific situation.

That's good to know about VITA! Unfortunately with my income at $78,500 I'd still be above the threshold you mentioned. Are there any other community programs with higher income limits?

You're right that at $78,500 you'd be above the standard VITA threshold. Some regions have expanded programs with higher limits, but they're not common. At your income level, your most cost-effective option is probably still using a budget tax preparer like FreeTaxUSA, TaxSlayer, or Cash App Taxes. Even though they're not free for you, they're much cheaper than the premium services and offer essentially the same functionality for most straightforward tax situations.

I used Cash App Taxes (formerly Credit Karma Tax) last year and it worked fine for me. Completely free for both federal and state with no income restrictions. The interface isn't as polished as TurboTax but it gets the job done. Just make sure your tax situation isn't too complex - they don't support some more obscure forms and situations.

Thanks for sharing your experience! That's good to know about the limitations with complex situations. My taxes are pretty simple - just a W-2, some student loan interest, and a small amount of bank interest, so it sounds like it might work for me.

Thanks for the tip! Should I be tracking home improvements too? I've heard some of them might be tax deductible but not sure which ones.

Absolutely track home improvements! While general home improvements aren't directly deductible, they add to your home's "basis" (essentially your cost of the home), which matters when you eventually sell to determine any taxable profit. Energy-efficient improvements are different - those can qualify for direct tax credits right now. This includes things like solar panels, energy-efficient windows, doors, insulation, heating/cooling systems, and water heaters. These credits can be substantial (up to 30% for solar), so definitely save those receipts!

This is good advice. In Illinois we have a program that can give you up to $6,000 in assistance, plus a separate tax credit. I almost missed both!