This thread has been incredibly helpful! I'm dealing with a similar situation but with a twist - my settlement was from a workplace injury and included workers' comp benefits. From what I've researched, workers' comp is generally not taxable, but I'm confused because part of my settlement was for "future lost earnings capacity" rather than just medical expenses. Does anyone know if settlements for future earning capacity from workplace injuries follow the same tax-exempt rules as regular personal injury settlements? I'm worried this might be treated differently since it's more speculative than actual medical costs or current lost wages. Also seeing all the mentions of AI tools and IRS callback services - might have to try those since my situation seems pretty complex with multiple settlement components!

Reading through all these responses has been super helpful - I had no idea settlements could be so complicated tax-wise! It sounds like the key thing is figuring out exactly what each portion of the settlement was for. @Oliver Fischer - based on what others have shared, since your settlement was specifically for a car accident with physical injuries, the bulk of it (medical expenses, pain and suffering) should be tax-exempt. But you'll want to check if any portion was specifically designated for lost wages or other taxable categories. One thing I'd add that I don't think anyone mentioned yet - make sure to keep really detailed records of your settlement breakdown and any correspondence with the insurance company. Even if most of it isn't taxable, having clear documentation will be crucial if the IRS ever has questions later. I learned this lesson the hard way with a smaller settlement a few years back. The AI tools and IRS callback services people mentioned sound really promising for getting definitive answers on the tricky parts. Better to spend a little money upfront getting it right than dealing with potential audit issues down the road!

I just went through this exact scenario with my craft business! I purchased $3,750 in materials in December 2023 but didn't sell anything until January 2024. My accountant had me file a Schedule C showing zero income, and we listed the inventory on Part III but didn't claim it as COGS yet since nothing sold. We did deduct my $850 in legitimate business startup expenses like my LLC filing fee, website costs, and business cards. The inventory will become COGS when I file my 2024 taxes as items sell.

Thanks for all the helpful responses everyone! Just to clarify a few additional points that might help other newcomers in similar situations: Make sure you keep detailed records of your inventory purchases with receipts and invoices - the IRS will want to see documentation if questioned. Also, don't forget about the business use of home deduction if you're operating from your residence. Even with zero sales, you can still claim a portion of your home expenses if you have a dedicated business space. And regarding accounting methods - you typically need to choose cash vs accrual when you file your first Schedule C, so research which makes more sense for your business type before filing.

Has anyone else run into issues with lenders when taking this approach? I did something similar last year, and even though we technically kept the same borrowing entity (the LLC), the bank eventually found out about the ownership change and triggered a due-on-sale clause in the mortgage. Ended up having to refinance at a higher rate.

This is a complex situation that requires immediate attention to several tax and legal issues. First, yes, an S-Corp can legally own 100% of an LLC, but there are critical steps you need to take to properly structure this arrangement. Since you've acquired the single-member LLC, it will become a disregarded entity for federal tax purposes unless you make a specific election otherwise. This means all income, expenses, and activities of the LLC flow through to your S-Corp's tax return (Form 1120S). You'll need to file Form 8822-B to update the responsible party information with the IRS, changing it from the original owner's SSN to your S-Corp's EIN. Regarding your property tax avoidance strategy, I'd strongly recommend checking your local jurisdiction's rules immediately. Many counties and states have closed this "loophole" by defining transfers of controlling interest in entities as taxable events. You may still face reassessment despite purchasing the LLC rather than the property directly. For mortgage payments, you can continue making them through the LLC as normal, but be aware that many commercial loans contain change-of-control provisions that could trigger acceleration clauses when ownership changes occur. I'd recommend consulting with both a tax professional and attorney familiar with your jurisdiction's property tax laws to ensure you're compliant with all requirements and to address any potential issues before they become problems.

Great question! Yes, you can convert your SEP IRA to a Roth IRA, but there are some important considerations beyond what others have mentioned. Since you had such a strong year ($70k contribution), you might actually be in a unique position to take advantage of this. One strategy to consider: if your income is typically lower in future years, you could potentially spread the conversion over 2-3 years to stay in lower tax brackets. However, if this was an unusually good year and you expect lower income going forward, converting more now while you're already in a higher bracket might make sense. Also, don't forget about the 5-year rule for Roth conversions - each conversion has its own 5-year clock for penalty-free withdrawals of the converted principal (though this may not matter much if this is truly for retirement). Given the complexity with the pro-rata rule and potential tax implications, you might want to model a few different scenarios - converting the full amount this year, spreading it over 3-4 years, or waiting for a lower income year. The "right" answer really depends on your specific tax situation and income projections.

Another important consideration that hasn't been mentioned yet is the impact on your Medicare premiums if you're approaching age 65. Large Roth conversions can significantly increase your Modified Adjusted Gross Income (MAGI), which is what Medicare uses to determine your Part B and Part D premiums through the Income-Related Monthly Adjustment Amount (IRMAA). For 2024, IRMAA kicks in at $103,000 for single filers, and the surcharges can add hundreds of dollars per month to your Medicare premiums. The surcharges are based on your income from 2 years prior, so a large conversion in 2024 would affect your 2026 Medicare premiums. If you're currently under 63, this might not be an immediate concern, but it's worth factoring into your long-term conversion strategy. You might want to complete larger conversions while you're younger and then switch to smaller amounts as you approach Medicare eligibility. This is yet another reason why spreading the $70k conversion over multiple years could be beneficial - it helps you avoid not just higher income tax brackets, but also potential future Medicare premium increases.

Something no one mentioned yet - if you live in a state with income tax, you'll likely owe state taxes on gambling winnings too! Each state has different rules. For example, some states allow you to deduct losses like federal, others don't. Make sure you check your specific state's rules.

One thing that might help ease your mind - the $600 threshold is just a reporting requirement, not a withholding trigger. Most sports betting platforms won't automatically withhold taxes from your winnings unless you hit much higher thresholds (usually $5,000+ and certain odds ratios). However, you're still responsible for paying taxes on ALL your gambling income when you file, regardless of whether taxes were withheld. Since you're expecting to stay under $5,000 for the year, you probably won't have automatic withholding, but you should set aside about 20-25% of your net winnings to cover federal and state taxes. Also, make sure you understand the difference between gross winnings and net winnings. You can only deduct losses up to your total winnings if you itemize deductions, so if you win $4,000 but lose $3,000, you'd pay taxes on the full $4,000 but could potentially deduct the $3,000 in losses. Keep every receipt and record!