Thanks for that advice! My settlement papers do actually specify that the entire amount is for "emotional distress damages" and not for lost wages or punitive damages, so that's helpful. I hadn't thought about keeping extra documentation from my attorney though. Would it be helpful to get a specific letter about the tax treatment, or is the settlement agreement itself sufficient?

The settlement agreement should be sufficient if it clearly states the damages are for emotional distress. However, having a supplementary letter from your attorney that specifically addresses the tax treatment can be helpful if you're ever audited. I'd recommend asking your attorney for a brief letter confirming that the settlement represents compensation for emotional distress and not for lost wages or punitive damages. If possible, have them reference any relevant tax code sections that apply to your situation. Keep this letter with your tax records for at least seven years (the typical IRS audit window for most situations).

This is bad advice. Different types of settlements have very different tax treatments. Personal physical injury settlements are tax-free. Emotional distress settlements are taxable but not subject to self-employment tax. Lost wages are taxable as regular income. Punitive damages are taxable as ordinary income. Just putting it on "other income" without properly documenting and reporting each component could lead to paying too much in taxes or, worse, an audit. The specific instructions from the expert in Comment 1 are much more accurate.

You're right that different settlements have different tax treatments. I should have been clearer - I meant the OP should report it as "other income" and specifically label it as "emotional distress settlement" as the expert suggested, not just lump it in with random miscellaneous income. My main point was that tax software can be helpful for situations like this. TurboTax Premium, for example, has specific sections for reporting legal settlements and will guide you through the correct forms and line items based on the type of settlement. It also helps you properly deduct attorney fees in these situations. I didn't mean to suggest taking a casual approach to the documentation - keeping all records is absolutely essential.

Do you have a specific mileage tracking app you recommend? And for the home office thing - is that still beneficial if we have an LLC? Does each partner get to claim their own home office or just one of us?

I personally use MileIQ, but there are several good ones like Everlance or Stride. Just make sure it logs your starting/ending points and lets you categorize trips. For the home office deduction, yes, it's still beneficial with an LLC since the LLC income passes through to your personal returns. Each partner can potentially claim their own home office deduction if they each use space in their respective homes exclusively for managing the rental business. The key word is "exclusively" - the space can't be used for anything else. The deduction would be proportional to your ownership percentage in the LLC.

Honestly, TurboTax is awful for complex situations like rental properties with partners. I switched to H&R Block's premium version and it walks you through the partnership stuff MUCH better. You'll enter the partnership info on Form 1065, which generates K-1s, then each partner enters their K-1 info on their personal returns.

Thanks so much for mentioning this! What kind of records specifically did you need to keep that you weren't keeping? I'm trying to understand how much additional paperwork I'll be taking on if I make the switch.

For the operating agreement, you need formal corporate bylaws that outline how the business operates. You'll need to hold annual shareholder meetings (even if you're the only shareholder) and keep written minutes of those meetings documenting major business decisions. You'll also need to file Form 1120-S (the S-Corp tax return) annually, plus provide K-1 forms to all shareholders showing their share of profits. You must maintain completely separate finances - separate bank accounts, credit cards, and clear documentation of all money moving between you personally and the business. My big mistake was taking money from the business without properly documenting whether it was salary or distributions. The IRS sees this as co-mingling funds and can use it to invalidate your S-Corp status.

Yes, you can have multiple business activities under one S-Corp. The key is proper accounting and record-keeping to track income and expenses for each activity. You'll report everything on one tax return but you may need to use different business codes and complete certain schedules to properly categorize the different revenue streams.

This is super helpful, thank you! I didn't even know I could check what my employer reported to the IRS. Do these transcripts become available pretty quickly after employers submit them, or is there a delay? If my W2 just got generated recently, would it even show up there yet?

The wage and income transcripts are usually available by late May or June for the previous tax year, but there can be some lag time. If your employer truly just submitted your information recently, it might not show up yet. However, most employers submit their W2 information by the end of January, even if they're slow in getting the actual forms to employees. It's always worth checking - you might be surprised to find your information has been there all along, which could potentially strengthen your case about employer negligence for the penalty abatement request.

I don't think this advice is correct. Form 4852 is only if you NEVER received your W-2 or if it's incorrect. Since OP has the W-2 now, even though it's late, they should use the actual W-2 for filing, not the substitute form.

Do you meet with your CPA in person or is it all virtual? I've been thinking about using someone out of state because they're cheaper than local options but wondered if that creates any issues.

I started with in-person meetings pre-pandemic, but we've been completely virtual for the past two years and it works great. I upload all my documents to her secure portal, we have a video call to discuss any questions, and then she prepares everything. For your situation, using someone out of state can work fine for federal taxes, but just make sure they're familiar with your state's tax laws if you have state income tax. My CPA specializes in my state's property tax rules which is helpful for my rental, but if you don't have special state circumstances, location probably doesn't matter much.

Those tax prep chains are so hit or miss. My parents got a great preparer at Jackson Hewitt for years but when that person left, the new person missed tons of stuff. I think it really depends on the individual preparer's experience more than the company.

Exactly! I think that's the problem - these big chains hire seasonal workers, give them minimal training, and then put them to work. Some might be great if they happen to have background knowledge, but many just follow the software prompts. My CPA actually takes continuing education courses every year to stay current on tax laws and asks me thoughtful questions about my situation that the H&R Block person never considered. She caught that I could deduct some medical expenses and home office deductions that were completely missed before.