Yes, we did call the police first! They came out and documented it, put one of those orange stickers on it, and told us we needed to wait 72 hours before having it towed. We followed all the proper channels. The police report actually said the car was reported stolen in another county, but for some reason the towing company still charged us because they said the owner didn't come claim it and they had storage fees.

That's good to hear! Since you followed the proper legal procedures, the expense would definitely qualify as an ordinary and necessary business expense for your rental activity. When you list it on your Schedule E, I recommend noting that proper procedures were followed and that it was necessary to maintain access to the property. While you probably won't need to provide that detail unless audited, it's good documentation to have.

The de minimis safe harbor election does simplify recordkeeping, but you still need to keep receipts! What it really does is allow you to immediately deduct small-cost items (generally under $2,500 per item or invoice) rather than having to capitalize and depreciate them. For example, if you buy a $200 microwave for your rental unit, you can deduct it immediately rather than depreciating it over several years. But you absolutely should keep those receipts - they're your proof if audited. The safe harbor is about how you treat the expenses, not whether you need documentation.

Thanks for this clear explanation! So even though he pays for a lot of their expenses, the relationship test is a hard requirement? Would we need to amend both our returns now, or just his?

The relationship test is absolutely a hard requirement that can't be worked around just with financial support. The IRS is very clear on this point. You'll need to amend your fiancé's return to remove the children as dependents. You should also file or amend your return to claim them if you're eligible (meet the tests for claiming your own children). This should resolve the issue with the IRS, though you might still face some penalties or interest if there was a significant underpayment on your fiancé's original return.

What about common law marriage states? Would that change anything in this situation?

This is what I did last year. Had about 10k in stock gains, maxed out my traditional IRA contribution for $6,500 which lowered my taxable income. Didn't eliminate the capital gains tax but my overall tax bill was lower. Every bit helps.

I actually haven't maxed out my 401k this year! Been too focused on my brokerage account since that's where I've been seeing better returns. But you're right, I should probably look at the tax advantages too. My company does a 5% match so I'm definitely leaving money on the table. Thanks for bringing this up - sometimes the obvious solutions get overlooked when you're trying to find clever tax hacks.

I'm in California (ouch) and in the 22% federal bracket based on my job income. Most of my gains are long-term thankfully, but I did have a few quick trades that'll be hit with short-term rates. I've been thinking about moving to a no-income-tax state at some point, but for now I'm stuck with CA's rates on top of federal. It's a double whammy.

Thanks for the specific advice. Do you think having a notarized statement from my parents (who live with us and helped care for my daughter while spouse was traveling) would be helpful to include with the cover letter?

Yes, a notarized statement from your parents would be very helpful since they're third-party witnesses to your child's living situation. The IRS values documentation from people other than the parents involved in the dispute. Having your parents include specific dates they helped care for your daughter while living in your home would add credibility to your claim. Just make sure they're precise about timeframes and their statement aligns with your overall documentation. This kind of supporting evidence can really strengthen your case with the IRS.

That's not what Form 8379 is for though? Injured Spouse is when you file jointly and want to protect your refund from your spouse's debts. OP is filing separately, so this wouldn't apply. I think you're thinking of something else.

Can you share any other examples you use? I have a teen who's starting their first job and I want to teach them right from the start.

I use a tax bucket analogy with actual buckets in class. Each bucket represents a tax bracket with its rate written on it. We pour "income water" into the first bucket until it's full, then overflow into the next bucket with a higher rate, and so on. It's very visual and helps them see that only the dollars in each specific bucket get taxed at that rate. For a teen with their first job, I'd focus on explaining the W-4 form and how to calculate their likely tax burden based on their expected annual income. Also explain FICA taxes (Social Security and Medicare), which are flat taxes, versus income tax which is progressive. Most teens are surprised to learn they might not owe any federal income tax if they make under the standard deduction amount, but they'll still see FICA taxes taken out.

You're not alone! I refused a raise for the same reason when I was younger. Such a mistake. I wonder how many people are making career decisions based on tax misconceptions?