Just FYI, tax software makes this WAY easier to figure out. You don't need to understand all the details about gross vs net income yourself. Programs like TurboTax, FreeTaxUSA, or even the IRS Free File options will walk you through entering your different income sources and expenses. I use HR Block and it automatically figures out my taxable income after I enter all my 1099 income and business expenses. The interview style questions make sure I don't miss any deductions too.

I'm a tax professional and wanted to add some clarity here. You're absolutely correct that taxes are based on your net income after legitimate business expenses, not gross income. However, I'd caution against relying solely on third-party tools or services without understanding the fundamentals yourself. For your specific situation with $42,000 in design income and $8,500 in business expenses, you'll report both amounts on Schedule C. Your net profit of $33,500 will be subject to both regular income tax AND self-employment tax (15.3%). This is important because many people forget about the self-employment tax component. A few key points: 1) Make sure all $8,500 in expenses are truly business-related and properly documented, 2) Consider whether any purchases should be depreciated over multiple years rather than deducted in full this year, 3) Track your home office expenses and vehicle mileage if applicable, and 4) Remember that your standard deduction will further reduce your taxable income after calculating your adjusted gross income. The quarterly payment advice mentioned earlier is spot-on - with $33,500 in net self-employment income, you should definitely be making estimated payments to avoid penalties. I'd recommend consulting with a local CPA for your first year with significant self-employment income to make sure you're set up correctly going forward.

Has anyone actually had their tax return audited after claiming AOTC for grad school? I'm in a similar boat (finished undergrad in 3.5 years) and want to claim it, but I'm nervous about getting flagged.

I'm actually a CPA who deals with education credits regularly, and I can confirm that you should be eligible to claim the AOTC for your first year of grad school. The IRS looks at whether you've completed the "first 4 years of post-secondary education" before the beginning of the tax year - since you completed your degree in 3 years, you have 1 year of eligibility remaining. The key factors that make you eligible are: 1. You haven't completed 4 academic years of post-secondary education 2. You're enrolled at least half-time in a degree program at an eligible institution 3. Your income is below the phase-out threshold (which you mentioned it is) One thing to double-check: make sure your graduate program is at an institution eligible for federal student aid. Most accredited universities are, but it's worth verifying. Also, keep good records of your transcripts showing you only completed 3 years of undergrad - this will be helpful documentation if the IRS ever has questions. Given your situation, you should be able to claim up to $2,500 in AOTC for qualified education expenses in your first year of grad school.

Wait a minute, I'm confused about something. If photography is truly just a hobby and not a business, isn't there a limit to how much you can deduct? I thought you couldn't claim losses on a hobby - like your deductions can't exceed your income from the hobby. Is that still true?

As someone who just went through this exact situation with my occasional photography sales, I can confirm that getting an EIN for privacy protection is totally legitimate and won't force you into business status. The IRS allows individuals to obtain EINs for various reasons beyond just business formation. Here's what I learned from my research and talking to a tax professional: 1. Having an EIN doesn't automatically require Schedule C filing - the determining factor is whether your activity meets the IRS criteria for a business (profit motive, regularity, time investment, etc.) 2. You can absolutely report the income on Schedule 1, Line 8 as hobby income even with an EIN. Just make sure to be consistent in how you treat the activity. 3. When you receive the 1099-NEC (which they'll likely issue for $600+), include a brief statement with your tax return noting that the 1099 income is being reported as hobby income on Schedule 1. This prevents automated IRS matching notices. 4. Creating an LLC isn't necessary for just getting an EIN - you can apply for one as a sole proprietor for privacy purposes. One thing to consider though: since hobby expenses aren't deductible anymore (thanks to 2018 tax law changes), you might actually save money by treating it as business income on Schedule C if you have legitimate photography expenses. The self-employment tax might be offset by equipment deductions, but run the numbers for your specific situation. The key is being consistent in your treatment and having a clear understanding of your intent with the activity.

One important thing nobody's mentioned - if you take 529 distributions for your mortgage, you CANNOT also claim those same housing expenses for other education tax benefits like the Lifetime Learning Credit. That would be double-dipping and is definitely not allowed. Make sure you're maximizing your overall tax benefit by figuring out which approach saves you more in your specific situation!

Great point about not double-dipping with other education tax benefits! This is something I actually learned the hard way when my tax preparer caught it during review. I'd been planning to use 529 funds for my mortgage AND claim the Lifetime Learning Credit for my tuition, but you have to choose one path or the other for any overlapping expenses. In my case, the 529 withdrawal ended up being more beneficial since I could cover a larger portion of my housing costs tax-free, rather than getting a smaller credit. For anyone in this situation, I'd recommend running the numbers both ways before deciding. Sometimes the education credits might actually save you more money than the tax-free 529 withdrawal, especially if you're in a lower tax bracket. It really depends on your specific income level and how much you're planning to withdraw from the 529. Also worth noting - you can still use 529 funds for some expenses (like housing) and claim education credits for others (like tuition and fees), as long as you're not double-counting any single expense. Just keep very clear records of which expenses you're applying to which tax benefit!

Quick tip - don't forget to separate out the land value! I made this mistake my first year with a rental property and had my depreciation rejected. You can only depreciate the building, not the land. Most tax assessor records break this out. Also, keep in mind that gifted property has different holding period rules for capital gains when you eventually sell. The holding period includes the time your dad owned it too!

This is a really complex situation, but you're asking the right questions! Based on what you've described, it sounds like you have a mixed gift/inheritance scenario which does complicate the basis calculation. One thing I'd suggest is checking if your dad filed Form 709 (gift tax return) when he added you to the deed in 2016. Even if no gift tax was owed (due to the annual exclusion or lifetime exemption), he may have filed one anyway. If he did, that form would show the fair market value of the property at the time of the gift, which would be incredibly helpful for your basis calculation. If you can't find a Form 709, using the 2016 tax assessment as a starting point isn't unreasonable, but as others mentioned, you might want to adjust it upward since assessments are typically below market value. You could research what similar properties in your neighborhood sold for in 2016 to get a sense of whether the assessment was in the right ballpark. Also, don't forget to account for any improvements your dad made to the property after his original purchase - those would increase his basis, which would then carry over to you for the gifted portion. The depreciation calculation can definitely be overwhelming, but taking it step by step and documenting your reasoning will serve you well if you're ever questioned about it later.