Is that always true though? I thought there were exceptions based on how many days you rent it and personal use days? The whole 14-day rule and all that?

That approach could potentially create even bigger problems. The IRS looks at the substance of transactions, not just the form. If they determine the arrangement is actually a disguised below-market rental, they could disallow your rental expense deductions AND potentially treat the "gifts" as taxable rental income that you failed to report. Additionally, regular monthly gifts that coincide exactly with rent payments would look suspiciously like a tax avoidance scheme. It would be hard to argue these are genuine gifts rather than just a way to circumvent the Fair Market Rent rules. I'd strongly advise against this approach.

Ah, I see. I didn't realize the IRS would look at the whole picture like that. Makes sense though - it would be pretty obvious what was happening if the gifts lined up exactly with rent payments. Thanks for explaining!

That's a really good point that I hadn't even considered! She's currently living in Australia and I have no idea what their rules are for small self-employment income like babysitting. Would we need to file tax returns in both countries then? And how does that work with the tax treaty stuff?

Australia definitely taxes residents on worldwide income, so yes, she likely needs to file there too. The good news is that the US and Australia have a comprehensive tax treaty. If she pays taxes in Australia, you can generally claim a Foreign Tax Credit on your US return using Form 1116 to offset US taxes on that same income. This helps prevent double taxation. Australia has a tax-free threshold of about 18,200 AUD, so if she's making less than that from babysitting, she might not owe Australian taxes anyway.

This FBAR stuff is terrifying! I've been doing my taxes myself for years and just found out about this requirement. Is there any kind of amnesty program if you've messed up in previous years? Also, does it matter if the account has barely any money in it?

That's really good advice! What kind of documentation would be acceptable for cash jobs? Most of his work is for neighbors who just pay cash, no invoices or anything formal.

For cash jobs, create your own simple invoice system - even a notebook where you write down the date, customer name, service provided, and amount paid is better than nothing. Some people use apps like Square or PayPal for small jobs which automatically creates a record. The key thing the IRS wants to see is consistency and reasonableness. If you can show a regular pattern of work and income that matches the lifestyle you report on your taxes, that goes a long way. For expenses, keep ALL receipts for anything related to the work. Home improvement stores, gas, work clothes, tool repairs - these can all potentially be deductible depending on how they're used. Just make a note on each receipt what job it was for.

Self-employment tax is currently 15.3% of net earnings (12.4% Social Security + 2.9% Medicare). On $4,000 of net income, that would be about $612 in self-employment tax. However, you can deduct half of that on your 1040, which slightly reduces your income tax. But remember, you'll likely have deductible expenses that reduce your net income. If your husband spent money on tools, supplies, transportation to jobs, etc., those costs can lower the taxable amount significantly. Sometimes with proper expense tracking, the taxable income might be much lower than the gross income.

Thanks! That's helpful to know. I didn't realize I could deduct expenses against that income. I was worried about owing a big chunk of that $4k, but if I can deduct the gas, tool repairs, and other expenses, it might not be so bad.

That's a really good point I hadn't considered. I probably spent 15 hours last year just on my taxes, and that was before all these complications. Do you know if tax preparation fees are tax deductible?

Unfortunately, tax preparation fees aren't deductible for individuals anymore since the 2017 tax law changes. However, if you have a business (which you do with your craft sales), you can deduct the portion of tax prep fees related to your business on Schedule C. So if your tax preparer charges $400 and roughly 30% of your return complexity is from your business, you could deduct about $120 as a business expense. Make sure they break down their fee so you can document this properly!

This is terrible advice. I thought the same thing until I got audited last year. Turns out I'd been incorrectly handling my home office deduction for my side business for 3 years. Ended up owing $3,200 in back taxes plus penalties. A $400 tax pro would have saved me thousands.

I registered it as what they call an "individual enterprise" in Turkey, which is basically their version of a sole proprietorship. There's no separate legal entity - the business and I are the same for liability purposes. Does that change anything about how I should approach the US tax side?

That's good news! If it's truly equivalent to a US sole proprietorship with no separate legal entity status, then you're on the right track with Schedule C reporting. Just make sure you keep documentation showing the legal status in Turkey in case of any IRS questions. Just be aware that as your business grows, you might want to consider the implications of potential liability exposure since you're personally liable for the business. Many people with foreign operations eventually set up an LLC in the US that owns the foreign business operations to create some liability protection while still maintaining pass-through tax treatment.

I used TurboTax Self-Employed last year for my Canada-based consulting business and it handled the Schedule C foreign expenses fine. You just enter everything in USD after converting the amounts yourself. The software doesn't help with the currency conversion or FBAR filing though - you have to handle that separately.