ThatBootsGuy's Tax Knowledge and Assistance

For those unaware, I am a tax professional.

I am not:

  • an investment advisor or the like
  • a lawyer

And I don’t deal with:

  • C-corps
  • S-corps
  • Partnerships
  • Foreign tax

With that out of the way, I have years of experience with personal income tax returns (US form 1040 and the like) and help run a company that sees over 1200 clients a year, of which I do about half.

The reason I’m making this thread is the amount of misinformation surrounding personal income tax is absolutely staggering, with this past year in particular being by far the most egregious thanks to the horrible news coverage.

This thread exists so I can answer questions and give advice in regards to US personal income tax, it’s not to discuss income tax on a meta level (no “tax is theft” please).

Also, legal reasons force me to put a disclaimer here along the lines of:

  • This advice and knowledge is not to be taken as gospel and is based on the law as I understand it at the time a post is made, laws change constantly. Income tax law is not easy and requires having access to a lot of highly personal information in order to give the most accurate assessments, which for obvious reasons isn’t a good idea to be posting in such a public forum.
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say you have 3k in stocks and plan to sell it, how much to keep for taxes?

or do I need more info

As a Reason subscriber, I am contractually obligated to say “taxation is theft”

Now that I have done my legal oblation, I have a question.


If say I have a hobby that could bring in about $100-$300 a month, would it be worth to do a sole proprietorship or wait until it reaches a higher amount? Specifically, would a sole proprietorship give me more options to write things off on tax’s, or is it not worth the hassle.

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When you sell stocks it depends on short or long term.

If it’s a short term sale (stock held less than 1 year) then you pay the tax on any gain at your regular income tax rate. If it’s a long term, then it gets reduced by your short term to figure your “net captial gain” which is then taxed at 0 if you’re in the 10% or 12% bracket and 15% for basically anyone else.

Because of the amount of the stocks, even with no basis you may not have to worry about it depending on what you got for a refund this year (obviously that is assuming there aren’t huge changes in your tax situation year to year).

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So, you’re dealing with roughly $3600 annually in income.

You could try to spin it as a business, but you need to prove a few things first:

  1. You have to carry it in a businesslike manner (i.e. complete accounting records)
  2. You need to put in enough time and effort to try and turn a profit
  3. Whether you depend on the income (this isn’t to say you need to rely solely on it, but you need to have some amount of dependency for it like maintaining a lifestyle)
  4. Whether your losses are due to circumstances beyond your control (basic startup costs, market forces, etc.)

And a handful more. The general rule is you need to turn a profit every 3/5 years (not including basic startup period).

The reason one would opt for a sole proprietorship vs a hobby is so they can show a loss on their taxes. With a hobby you can only claim expenses up to the amount of your earnings. By showing a loss you lower your taxable income by the amount of your loss. So for instance, if you made 50k at your job, but showed a loss of 10k on your business, you’d end up with 40k taxable before any other deductions and adjustments are applied.

Personally I wouldn’t bother with trying to go with a sole proprietorship because the amount is pretty minuscule in the grand scheme of things and may increase the likelihood of an audit. Also, depending on your state and what industry your side gig is in you may have to file sales tax, get certain insurances, etc.

since '96 lol

I’ve been wanting more things like this, financials, planning, life ‘stuff’ that can help people here.

So just a thanks (i’m not in the US so no good for me :smiley: )

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I think now would be a good time to formulate a “tax strategy” for next year.
My daughter starts college next year, any tips for maximizing my tax benefit?

Edit
Also any geneal advice that may apply for students which may halp forum wide. Never went to coledge myself but allot of people here are students.

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So, once she starts college she will receive a 1098-T in her name. That paper will most likely go with your return.

The rules surrounding dependents once they get to college age are somewhat confusing so hopefully I can help explain things in a way most can understand.

  1. They need to live with you more than half the year (Living on campus counts as living with you as it’s a temporary absence from the home)
  2. They need to be in school more than 5 months
  3. They need to be under age 24 at the end of the year
  4. They CANNOT claim themselves on their own tax return, HOWEVER, they can (or may need to depending on their circumstances) file a return. This is just like anyone else filing a tax return, just they don’t claim themselves on there because they are a dependent of another.

So, if they are indeed your dependent pursuant to the above list you now potentially have access to one of 2 credits or 1 adjustment.

Let’s look at the credits first (since they’re what you’ll most likely want).

The first of the credits is the American Opportunity Credit (AOTC). This is the big one. It is worth up to $2,500 of which $1,500 is refundable (a credit that can be taken even with no tax liability). It can only be claimed for 4 years so you want to save this one until they are in school full time. It is based off of “qualified expenses” which for the purposes of this credit include things that need to be paid to the institution in order for the student to be a student (i.e. tuition, fees, etc) in addition to books. This does not include things like food or room and board.

The other credit which is available is called the Lifetime Learning Credit (LLC). This is slightly smaller at only $2000 and is entirely non-refundable (you can only claim the amount up to your tax liability). It is also figured a bit differently than the AOTC in that it is a straight 20% credit. This means, if you have 10k of qualified expenses (the max allowable for the credit) you may be eligible for the full $2,000, where under the AOTC it would reach the max credit amount at a lower qualified expense amount. The other way in which this credit differs significantly from the AOTC is they do not allow books to be included in the qualified expenses. You can, however, claim this credit an unlimited number of times.

The adjustment that is available is the tuition and fees deduction. This also has a max dollar amount on it and only lowers your taxable income by up to that amount. I don’t have the book in front of me so I can’t say for certain what those amounts are, but I’ve never done a return with one on there because the LLC is just so much better than this one in basically every situation.

With these credits there are income phaseouts, so if you make over a certain amount your max credit decreases down to zero.

As far as what to use when figuring the qualified expenses you should get a copy of your dependent student’s college account record showing the tuition, fees, books (if claiming the AOTC), along with the scholarships and grants that are taken. Those scholarships and grants reduce the amount of qualified expenses that can be claimed so if you end up with more of those than expenses then you are SOL. Loans don’t affect the calculation at all.

Now what I sometimes do for my clients is figure what the child would’ve received if they did claim themselves to see what they would’ve gotten, then the parents will give them what the child would’ve gotten and everyone comes out ahead because the benefit is much greater on their return than the child’s. Which could be something to think about.

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Thank you so much!

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What about students themselves? Are they any pro tips for students on their tax’s?

Also for a more fringe case, if a student is getting more in tuition assistance than their tuition cost, is that taxed as income?

Students are pretty much SOL. As a dependent, you don’t have access to pretty much any credits or adjustments, which is why a bunch of my clients split the benefit on their return with their kid.

Nope. That is entirely tax free. It just means they (or their parents if they’re a dependent) can’t claim any of the college credits.

Am too old to be one, would I have options then?

I ask cuz I had $100 over and the H&R block lady was freaking out saying I needed to justify it. It was werid

If you’re too old then you just file it as a parent would. You claim all the credits and whatnot that goes along with it.

Granted, if one’s income is below $4,150 iirc (it changes every year) you can still qualify as a dependent regardless of age if you qualify as a dependent under the other rules.

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Darn, was hoping I was missing something and could get more back haha

I always make more than 6k a year. Can’t eat or have fun without that.

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Thanks for the response.

For simplicity’s sake, let’s say I do a $10 trip. Lyft takes 20% ($2) off the top, which means I only make $8. California takes 15% of that ($1.20) for self-employment, and I think another 9.3% ($0.75) for income tax, which leaves me with $6.05 for like 20 minutes of work.

That’s not bad if I’m doing the math right, but factor in the gas and it’s significantly lower because I get about 11mpg in the city. I probably will take home about $3 for a $10 trip.

But there are also tips as a bonus (non-reliable source). Are tips taxed? Plus mileage which is $0.58 I believe (it is for my main job), which more than covers the cost of gas even in my gas guzzler. If I did the calculations correctly it costs me about $0.26 per mile in gas. Too bad I don’t get that money until tax season comes around.

I dunno if it’s really worth it, or if it would be better just to find some actual part-time work, but we’ll see. Would be great if I had a Prius though lol, but I ain’t getting rid of the truck any time soon.

And like you said, I can claim stuff as business expenses. I plan on buying a cooler and bottled water for people on rides. And I want to get a 2-direction dash cam because of the horror stories of false sexual assault accusations and stuff like that too. So I guess worst case scenario I only make a little extra cash, but I get a free dash cam.

Hell, maybe I could get a new stereo for free too. Mine has been acting up, and that definitely has an effect on customer satisfaction.

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Yup. I think Lyft just includes them on the 1099 so you can’t hide it. Though if they didn’t put them on there then I didn’t hear anything about you making tips :wink: . It’s not Cali that takes the se tax, well they do take some but the figure I gave you is the federal amount (you have a federal as well as state income tax if you were unaware).

Mileage has been 53.5 to 54 cents/mile for tax purposes for quite a few years now. Your job may over-reimburse you which is where the 58 cents comes from. Or it could be California’s rate, I have no clue about CA taxes.

You can certainly write off the dash cam, et al because it’s being used for business. I did see in the reddit post that they had meals on there. You can take meals, but it’s only 80% iirc.

The amount of income tax is dependent upon what you make at your main job. If you were on the cusp then lyft might put you over into the next bracket. In that scenario I don’t think it’d be worth it. If you’re not at the upper end of a bracket it could be pretty lucrative. I’d have to have a ton of personal information to be able to figure out for sure if it is doing more harm than good.

One thing to keep in mind going forward is you may have to send in estimated tax based on how much you’re pulling in from lyft. Estimated tax is essentially you sending in your social security, medicare, and withholdings during the tax year in order to avoid the underpayment penalty (a fine levied as a result of not paying enough tax during the tax year, usually kicks in if you owe more than 1k on federal after everything is put in there, the state varies).

As far as what the mileage rules are:

  1. you can’t take commuting miles (your drive from your house to the ride)
  2. you can take pretty much everything else. Your driving from dropping off one ride to pick up another, if you start up right after work and head right to the fare from your workplace, and obviously when you have the client in the car which I believe lyft keeps track of.
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Don’t forget the the getting to the fair that your aren’t paid for in your income equation and the drive back at the end of the night.

Assuming this graph from taxfoundation.org is correct, I’m at the lower-mid range of 22%, so I’m safe from hitting the next bracket. 22% though… wtf… So between se, state, and federal, I’m paying 46% in taxes? I’m starting to feel like the only money I’m going to make is off mileage.

Is medicare, ss, and witholdings included in that 22%? If not I might as well just quit now.

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It’s not as bad as you think. This is a graduated income tax system so only the money you earn in excess of X bracket gets taxed at that amount. State taxes are much less than federal as well. As for the se tax… it’s only levied against 90% of your self employment income (lyft). The amount of lyft that is getting taxed is whatever the PROFIT is, not the gross amount.

So the way it works is you take all of your other income (w-2s, stock sales, gambling winnings, etc.) and add it to the amount that comes out at the end of the schedule C (lyft earnings minus all expenses).

So let’s say you earn $10k from lyft, you paid h&r $300 last year, you bought a dash cam for $200, drove 10k miles and $100 other expenses. 10000x0.54=5400 added to your other other 600 in expenses so your net profit on paper is $4k. 4000x90%=3600 which is the amount of income the se tax is levied against. 3600x15%=540 the total amount of se tax.

Now, The full $4k is taxed at your regular rate (480 assuming 12%), which pluss the 540 is $1020. However, you get a deduction of half your se tax so it reduces your total income by half that se tax (so you’re not paying income tax on the amount of medicare and ssa that would’ve been paid by your employer). That means the $1020 figure is a little higher than what it actually is. It’s actually ((4000-270)x12%)+540=992.

Finally the whole picture shows that it’s effectively a 24.8% tax rate in total for lyft at a $4k profit margin. Mileage isn’t actually fully realized in your wallet either, so you have a decent portion of that 5400 there in your pocket in addition to the reported and taxed 4k which makes the effective tax rate even less. It’s not like that is the amount you have to pay at the end of the year either. You have withholdings from your other job, and hopefully some adjustments and credits that can lower the liability even further.