Thanks for this info! I'm new to the hair business (just got licensed last year). Question - can you deduct the cost of your own haircuts/color since we have to look good for clients? And what about clothes you wear to work?

Unfortunately, you cannot deduct the cost of your own haircuts/color even though we need to look good for clients. The IRS considers these personal expenses, not business expenses, even for hairstylists. It's frustrating but that's how they interpret the tax code. As for work clothes, you can only deduct clothing that is not suitable for everyday wear. For most hairstylists, our work clothes can be worn outside of work, so they're usually not deductible. However, if you have to buy specific uniforms with salon logos or specialized protective clothing that you wouldn't wear elsewhere, those may qualify as deductible expenses.

I got audited 2 years ago and they did question my health insurance deduction! But I had all my premium statements and proof of payment, and I was fine. The key is documentation - keep records showing you paid the premiums and that those payments match what you deducted. Don't be afraid to take legitimate deductions!

Thank you for mentioning estimated tax penalties - I hadn't even thought about that! Do you know what percentage of my total tax liability I need to have covered through withholding/payments to avoid the penalty? Also, is the mortgage interest deduction still worth it with the higher standard deduction? We pay about $1,300/month in mortgage interest.

Generally, you need to have paid at least 90% of your current year tax liability or 100% of last year's tax liability (110% if your AGI was over $150,000) through withholding and estimated payments to avoid the penalty. Since you mentioned both employment and business income, you'll want to calculate this carefully. With the mortgage interest, it depends on your total itemized deductions. At $1,300/month, that's $15,600 annually. For 2024, the standard deduction for married filing jointly is $29,200. So unless your other itemizable deductions (state/local taxes up to $10,000, charitable contributions, etc.) push you over that threshold, the mortgage interest alone won't make itemizing worthwhile. But if you're close to that threshold, making strategic charitable donations could tip you over to where itemizing makes sense.

This is a legitimate strategy called "income timing" or "income shifting" - IF you're using cash basis accounting (which most small businesses do). You can delay sending December invoices until January to recognize that income in the next tax year. Just make sure you're consistent with your accounting method. The flip side is also true - you can accelerate deductions by making business purchases before December 31st rather than waiting until January. Just ensure whatever you purchase is actually needed for your business and isn't just spending money to save on taxes (which rarely makes financial sense).

Do you know what happens if you don't file the 709 form? Are there penalties? I gave my sister about $30k last year for medical bills and had no idea I needed to file anything since I'm nowhere near that lifetime limit.

There can definitely be penalties for not filing Form 709 when required, even if no tax is due. The standard penalty is 5% of the tax owed per month, up to 25%. But since you likely don't owe any actual tax (just needed to file the form), the penalty might be minimal or potentially zero if you can show reasonable cause. For your specific situation with your sister, you might actually qualify for a medical expense exception. Payments made directly to medical providers on someone else's behalf are exempt from gift tax and don't require filing. But if you gave the money directly to your sister who then paid the bills, that's technically a reportable gift. I'd recommend speaking with a tax professional about filing a late 709 to get compliant.

Thank you for this clear breakdown! I was definitely mixing up the different concepts. So if I understand correctly, I can give gifts to anyone (younger, older, same age) and use my lifetime exemption, but there are extra rules if the person is much younger than me (like grandchildren)?

Exactly right! Your lifetime gift tax exemption ($12.92 million in 2023) applies to all taxable gifts regardless of the recipient's age. You can give to your spouse, sibling, friend, or anyone else and it works the same way for basic gift tax purposes. The generation-skipping transfer (GST) tax is an additional layer that only applies to gifts to people who are at least 37.5 years younger than you (or in a defined generational category like grandchildren). These transfers are potentially subject to both regular gift tax and GST tax, but there's a separate GST exemption amount (currently also $12.92 million) to offset this additional tax. This was designed to prevent wealthy families from skipping tax by bypassing a generation.

Thank you SO much for pointing this out! I hadn't even thought about my son potentially checking the wrong box. Did that delay your refund significantly? And is there anything else I should warn him about on his return?

Yes, it delayed our refunds by about 3 months and we had to submit additional documentation proving I provided more than half his support. Super frustrating! Also make sure he understands he won't get certain credits like the recovery rebate credit or earned income credit that are only for independent filers. My son was confused because TurboTax initially calculated a bigger refund before he marked himself as a dependent. The software correctly adjusted it, but he thought he was doing something wrong because the refund amount dropped.

I used FreeTaxUSA for both my return and my son's last year. It asks really clear questions about dependent status and was completely free for his simple return. For mine it was only $15 for state filing. TurboTax wanted to charge us for deluxe versions for both returns which was unnecessary.

This is brilliant advice about the 15-minute chunks. I've been completely avoiding my tax situation because it feels too overwhelming. Breaking it down like this might actually help me start tackling it. Do you think it's better to start with organizing documents first or jumping straight into the payment plan applications?

I definitely recommend starting with organizing your documents first. Gather everything you have - tax returns, notices from the IRS, pay stubs, bank statements, bills, etc. Just having everything in one place reduces the mental load significantly. Once you have your documents organized, then use a 15-minute session to read through any notices carefully and make notes about what you need to do next. This makes the payment plan application process much smoother because you'll have all the information readily available when filling out forms or talking to representatives.

The tea ritual sounds helpful but where do you find these VITA people? Are they only available during tax season or can you talk to them year-round for planning purposes?