IRS matters
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What happens if you don’t file, why the IRS’s substitute return usually overstates what you owe, how returns can be prepared without your old records, and how far back you need to go.
If you’ve missed a year or several, you’re not alone, and it’s almost always better to deal with it before the IRS does. Penalties for not filing grow at 5% of the unpaid tax per month, up to 25%, on top of interest.
When you don’t file, the IRS may prepare a “substitute for return” from the W-2s and 1099s it has. These usually overstate what you owe because they don’t include your deductions, dependents, or business expenses. We can replace them with accurate returns.
You don’t need all your old records. We can get your income information from the IRS. In most cases the IRS asks for the last six years to bring you back into compliance, and refunds are available only for about the last three.
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The IRS “Dirty Dozen” Tax Scams
The IRS’s annual list of the most common tax scams (phishing, fake charities, bogus credit claims, ghost preparers) and how to protect yourself.
Each spring the IRS publishes its “Dirty Dozen,” a list of the scams it sees most. The 2026 list (released March 5, 2026):
- IRS impersonation by email and text, often with QR codes leading to fake IRS websites
- AI-generated phone calls that sound like IRS agents, with spoofed caller ID
- Fake charities, especially after disasters
- Bad tax advice on social media: viral “tax hacks” that lead to false claims
- Identity theft through IRS Online Account, including scammers offering to “help” you set one up
- Fake undistributed capital gains claims (bogus Forms 2439)
- The nonexistent “Self-Employment Tax Credit”
- Ghost preparers who won’t sign the return they prepared
- Inflated non-cash charity deductions, such as conservation easement and art schemes
- Overstated withholding on fabricated W-2s or 1099s to create a refund
- Phishing and malware aimed at tax professionals
- “Offer in Compromise mills” that charge large fees to people who don’t qualify
How to protect yourself: The IRS normally contacts you first by mail. It doesn’t demand payment by gift card, wire, or cryptocurrency, and it doesn’t threaten arrest. If in doubt, don’t click; call us or the IRS at a number you look up yourself. An IRS Identity Protection PIN (free at IRS.gov/ippin) keeps anyone else from filing a return in your name. Your preparer should always sign your return and include a Preparer Tax Identification Number (PTIN). Every return we prepare is signed by an Enrolled Agent.
Reporting: forward phishing emails to phishing@irs.gov, report other schemes at IRS.gov/SubmitATip, and report identity theft at IRS.gov/idtheft.
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Got a Letter from the IRS?
What common IRS letters mean, why you shouldn’t ignore them, and how we handle notices, audits, and collections.
Most IRS letters aren’t emergencies, but every one has a deadline, and ignoring it is how a small problem becomes a big one. The letter names a notice number in the top or bottom right corner, such as CP2000 or CP14, and that tells us what the IRS wants.
- CP2000, a proposed change. The IRS matched your return against W-2s and 1099s and thinks something was left off. It’s a proposal, not a bill. You can agree, partly agree, or disagree, and the IRS is often wrong about the cost basis of stock sales.
- CP14 and later balance-due notices. These are reminders that tax is owed. They escalate in steps, so the sooner a balance is dealt with, the more options you have.
- Final notice of intent to levy (LT11 or Letter 1058). Take this one seriously. You generally have 30 days to request a hearing that protects your appeal rights.
- Audits. Most are done by mail and ask for documents supporting a few items. They aren’t the in-person ordeal people picture.
- Collections. Installment agreements, temporary hardship status, and, for some people, an offer in compromise. Be wary of companies that advertise “pennies on the dollar” settlements. (See The IRS “Dirty Dozen” Tax Scams.)
Is it real? The IRS starts by mail. It doesn’t call, text, or email demanding immediate payment, and it never asks for gift cards. If you’re unsure, don’t call the number on a suspicious letter; we’ll verify it.
As an Enrolled Agent, I’m licensed to represent you before the IRS. With your signed power of attorney, I can talk to the IRS for you, so you don’t have to. For large balances or complex collection cases, I work with tax attorneys who are reasonably priced. Bring us the letter and the return it refers to. Colorado Department of Revenue letters are welcome too. Call 303-734-1040.
Individual tax
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Some taxpayers call these insults. IRMAA, the Child Tax Credit, Roth IRAs, rental losses, the 3.8% investment tax, depreciation recapture, and two dozen other breaks that shrink or vanish as income rises.
Most tax breaks come with an income limit, and the limit is often not what people expect. Cross it and the credit shrinks, the deduction disappears, or a surcharge appears. The IRS calls it a phase-out.
This page lists more than thirty of them: the Medicare premium surcharge known as IRMAA, the Child Tax Credit, the education credits, student loan interest, the $25,000 rental loss allowance, Roth and traditional IRA limits, the new deductions for seniors, tips, overtime, and car loans, the QBI deduction for service businesses, the SALT cap, the Net Investment Income Tax, the AMT, and the surprises that come with selling a rental, inheriting an IRA, or getting a bonus.
Each one gets a plain-English explanation, the 2026 threshold, and, in blue, what the person paying for it tends to think about it.
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Mortgage interest, state and local taxes, charitable gifts, and medical expenses: what can be itemized, the current SALT limit, and how to tell whether itemizing beats the standard deduction.
You get to use whichever is larger: the standard deduction or the total of your itemized deductions. For 2026 the standard deduction is $16,100 for single filers, $24,150 for heads of household, and $32,200 for married couples filing jointly.
The main itemized deductions are mortgage interest, state and local taxes, charitable gifts, and medical expenses above 7.5% of income. The 2025 tax law raised the state and local tax (SALT) cap from $10,000 to $40,000 for 2025 and $40,400 for 2026, with a reduction for incomes over $505,000.
Starting in 2026, people who don’t itemize can also deduct up to $1,000 of cash gifts to charity ($2,000 married filing jointly).
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When a casualty or theft loss is deductible (generally only when tied to a declared disaster), how the loss is calculated, and the option to claim it on the prior year’s return.
Damage to your home, car, or belongings from a fire, storm, flood, or theft is deductible only if it’s tied to a federally declared disaster. Starting in 2026, certain state-declared disasters also qualify. Everyday losses such as a car accident or burglary generally aren’t deductible.
The loss is the smaller of the drop in value or your cost basis, minus insurance. It’s then reduced by $100 per event and by 10% of your income. For qualified disaster losses the reduction is $500 per event with no 10% floor, and you can claim the loss even if you take the standard deduction.
You can choose to claim a disaster loss on the prior year’s return, which can bring you a refund sooner.
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The Box 2 Bermuda Triangle
Several W-2 jobs, no federal tax withheld on any of them, and a big tax bill when the return is prepared. Why it happens, how we handle it, and how to keep it from happening again.
Every tax season brings a few bad surprises, and this is one of the most common. Picture six W-2s at $15,000 apiece, with a big fat zero in Box 2 on every one of them. How does that happen? Each employer figures withholding as if their job is the only one you have. A $15,000-a-year job barely clears the standard deduction, so the payroll system sees nothing worth withholding. Social Security and Medicare still come out, but federal income tax doesn’t. Six employers each decide you owe nothing.
Then it comes time to prepare your tax return for the previous year, the IRS adds it all up, and you’ve earned $90,000 with nothing paid in. Federal tax on that is roughly $11,000 for a single filer, and the IRS may add an underpayment penalty for not paying as you went. Nobody did anything wrong, exactly. Six payroll departments just never talked to each other. The same thing happens to married couples who both work: each employer withholds as if that paycheck is the household’s only income, and the combined income lands in a higher bracket than either W-4 assumed.
If it’s already happened, we have a solution: we can include an installment agreement request with your tax return, so you pay the balance over time instead of all at once. Interest and penalties still apply until it’s paid, but it turns an ambush into a monthly payment.
To keep it from happening again, get your withholding fixed now, whatever time of year it is. The key is knowing your tax rate on your total income from all jobs. In the example above, $11,000 of tax on $90,000 is about 12%, so each $15,000 job needs to withhold about $1,800 a year, or roughly $70 a paycheck if you’re paid every two weeks. Give each employer a new W-4 and enter that extra amount in Step 4(c). Married couples who both work can check the box in Step 2 instead. The IRS Tax Withholding Estimator can help with the math, or come see us at the Tax Shop and we’ll run the numbers before the Bermuda Triangle swallows your refund.
Self-employed? Read the companion topic, Lost at Sea: Self-Employed Without Books.
Also known as: The Phantom Withholding · Surprise! You Were Underwithheld · Death by a Thousand Paychecks · The “I Thought They Were Taking Taxes Out” Revue
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The Earned Income Tax Credit
A refundable credit worth up to $8,231 for working families in 2026, who qualifies, and the mistakes that delay refunds or trigger audits.
The Earned Income Tax Credit (EITC) is one of the most valuable credits for working people with low to moderate income. It’s refundable: if the credit is larger than the tax you owe, the IRS sends you the difference.
For 2026 the maximum credit is:
Qualifying children Maximum credit None $664 One $4,427 Two $7,316 Three or more $8,231 The credit is based on your earned income from wages or self-employment and phases out as income rises. Married couples with three children can qualify with income up to about $70,000. You’ll also need a valid Social Security number, investment income of $12,200 or less, and, if you have no qualifying children, you must be between 25 and 64.
Where it goes wrong. EITC errors are among the most common reasons returns get audited. The usual problems are claiming a child who didn’t live with you for more than half the year, two parents claiming the same child, and self-employment income reported incorrectly. That’s why we ask detailed questions about who lives with you and for how long. Preparers are required to.
Timing. By law, the IRS can’t issue refunds that include the EITC before mid-February, even if you file in January.
Colorado has its own earned income credit, figured from the federal credit, so qualifying for one usually means a benefit on your state return too.
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New for 2025–2028: Deductions for Tips, Overtime, Seniors, and Car Loans
Four temporary deductions from the 2025 tax law: who qualifies, how much, and the income limits.
The 2025 tax law created four new deductions that run from 2025 through 2028. All four are available whether you itemize or take the standard deduction, and all four phase out at higher incomes.
- Tips. Up to $25,000 of qualified tips a year, for workers in occupations where tipping is customary, including both employees and self-employed workers. The tips must be voluntary. Mandatory service charges don’t count. The deduction phases out above $150,000 of income for single filers and $300,000 for joint filers.
- Overtime. Up to $12,500 a year, or $25,000 on a joint return, but only the extra part of overtime pay. If you earn $30 an hour and get time-and-a-half, the deductible part is the $15 premium, not the full $45. It must be overtime required by federal wage law. The same income limits apply.
- Seniors. An extra $6,000 deduction for each person 65 or older, so $12,000 for a married couple who both qualify. It’s on top of the additional standard deduction seniors already get, and it phases out above $75,000 of income single or $150,000 joint. It’s often called “no tax on Social Security,” but that’s not what it does: it lowers taxable income for anyone 65 or older, whether or not they collect benefits.
- Car loan interest. Up to $10,000 a year of interest on a loan for a new vehicle bought for personal use, with final assembly in the United States, and a loan taken out after 2024. Used cars and leases don’t qualify. It phases out above $100,000 single or $200,000 joint.
What to bring: pay stubs or records showing tips and overtime, and your loan statement and vehicle VIN. Married couples generally must file jointly to claim the tip and overtime deductions.
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Marketplace Health Insurance: Why 2026 Could Bring a Surprise Bill
If you buy coverage through Connect for Health Colorado, the rules changed for 2026, and the cap that limited paybacks is gone.
If you get health insurance through Connect for Health Colorado and receive help paying the premium, that help is an advance on a tax credit. When you file, the credit is recalculated on Form 8962 using your actual income for the year. If you earned more than you estimated, you pay back the difference.
What changed for 2026:
- No more repayment cap. Until now, most people’s paybacks were capped at a few thousand dollars at most. Starting with 2026 returns, there’s no cap: you repay the full excess.
- The income cliff is back. The enhanced subsidies of recent years expired at the end of 2025. If your household income ends up above 400% of the federal poverty level, you qualify for no credit at all and repay everything you received.
How to protect yourself:
- Report income changes to Connect for Health Colorado as they happen: a raise, a new job, a spouse going back to work, a large IRA withdrawal, or selling a rental.
- If a job offers you affordable coverage, you generally aren’t eligible for the credit anymore.
- File Form 8962 even if you wouldn’t otherwise need to file. Skipping it can cost you the credit in future years.
- Bring your Form 1095-A. We can’t finish your return without it.
Not sure where your income will land? Call us in the fall, before the year ends, and we’ll estimate it. (See also The Box 2 Bermuda Triangle.)
Retirement
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Who can contribute, who can convert, the 2025 and 2026 limits and deadlines, how the backdoor Roth works, the pro-rata rule, and how to fix an excess contribution.
Roth IRA contributions aren’t deductible, but qualified withdrawals, including all the growth, are tax-free, and there are no required distributions during your lifetime. The limit is $7,000 for 2025 and $7,500 for 2026, plus $1,000 ($1,100 in 2026) at age 50 or older.
The ability to contribute phases out at higher incomes: for 2026, between $153,000 and $168,000 for single filers and between $242,000 and $252,000 for married couples filing jointly. Anyone can convert a traditional IRA to a Roth regardless of income; the converted amount is taxed in the year of conversion. That’s how the “backdoor Roth” works.
Watch out for the pro-rata rule: if you have other pre-tax IRA money, part of every conversion is taxable.
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How an HSA works, the 2026 limits, and the HSA deduction we find missing on self-prepared returns every tax season.
An HSA is the only account that’s tax-free going in, tax-free while it grows, and tax-free coming out for medical expenses. For 2026 you can contribute up to $4,400 with self-only coverage or $8,750 with family coverage, plus $1,000 if you’re 55 or older.
Contributions made through payroll are already left out of your W-2 wages. Contributions you make on your own are only deductible if you claim them on your return, and that’s the deduction self-prepared returns miss most often.
Check last year’s return: if you put money into your HSA yourself and Schedule 1, line 13 is blank, call us at 303-734-1040.
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Workplace plans, traditional IRAs, and the Saver’s Credit: contribution limits, catch-up contributions, and how each account is taxed going in and coming out.
For 2026 you can put up to $24,500 into a 401(k), 403(b), or most 457 plans, plus $8,000 more at age 50 or older (ages 60 to 63 get $11,250). The IRA limit is $7,500, plus $1,100 at 50 or older.
Traditional contributions reduce your taxable income now, and withdrawals are taxed later. Roth contributions are taxed now and come out tax-free. If you have a workplace plan, your traditional IRA deduction phases out at higher incomes.
Low- and moderate-income savers can also claim the Saver’s Credit, worth up to $1,000 ($2,000 joint), for income up to $40,250 single or $80,500 joint in 2026.
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Retirement Income: Social Security, RMDs, and Charitable IRA Gifts
How much of your Social Security is taxable, the required minimum distribution rules, and giving to charity straight from your IRA.
Social Security. Up to 85% of your benefits can be taxable, depending on your “provisional income”: your other income plus half your benefits. Below $25,000 (single) or $32,000 (joint), none of it is taxed. These thresholds have never been adjusted for inflation, so more retirees cross them every year. You can have federal tax withheld from benefits by filing Form W-4V with Social Security.
Required minimum distributions (RMDs). Starting at age 73 (75 if you were born in 1960 or later), you must take a minimum amount out of traditional IRAs and 401(k)s each year. Missing one brings a 25% penalty on the amount you should have taken, reduced to 10% if you fix it promptly. You can delay your first RMD until April 1 of the following year, but then you take two in one year. Roth IRAs have no RMDs while the owner is alive.
Giving to charity from your IRA. If you’re 70½ or older, a qualified charitable distribution sends money directly from your IRA to a charity, up to $111,000 for 2026. It isn’t taxed, it counts toward your RMD, and it works even if you don’t itemize. For many retirees it’s the best way to give. The money has to go straight from the IRA to the charity; if the check comes to you first, it doesn’t qualify.
Don’t miss: the new $6,000 deduction for people 65 and older. (See New for 2025–2028.)
Colorado lets people 65 and older subtract all federally taxed Social Security, and many people 55 to 64 can too. There’s also a separate subtraction for pension and IRA income.
Real estate
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How a like-kind exchange lets you defer tax when you sell rental or investment real estate, the 45-day and 180-day deadlines, what counts as like-kind property, and why you need a qualified intermediary.
A 1031 exchange lets you sell rental or investment real estate and put the proceeds into another investment property without paying tax on the gain now. The gain isn't forgiven. It carries over into the new property and is taxed when you eventually sell without exchanging.
The rules are strict. You have 45 days after the sale to identify replacement property in writing and 180 days to close on it. The sale money has to go through a qualified intermediary, never your own account. Since 2018, only real estate qualifies; your home and property held for resale don't.
To defer all of the tax, buy replacement property of equal or greater value and replace the debt you paid off. Cash you keep, or debt that isn't replaced, is taxable “boot.”
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The two-out-of-five-year rule, what can reduce the exclusion, and the special five-year rule for a home you acquired in a 1031 exchange.
If you owned your main home and lived in it for at least two of the five years before you sell, you can exclude up to $250,000 of gain, or $500,000 for a married couple filing jointly. There’s no five-year ownership requirement for an ordinary purchase.
Depreciation from a home office or rental use, and years the home was a rental before you moved in, can make part of the gain taxable.
If you acquired the home in a 1031 exchange, there’s an extra rule: sell within five years of the exchange and you get no exclusion at all, even if you meet the two-year tests.
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How the $250,000 / $500,000 home-sale exclusion works, and how converting a long-held home to a rental can let you exclude part of the gain and defer the rest.
If you’ve owned and lived in your home for at least two of the last five years, you can exclude up to $250,000 of gain from tax, or $500,000 for a married couple filing jointly. Long-time owners in the Denver area often have more gain than that.
One option is to convert the home to a rental, hold it for a period as a rental, then sell it through a 1031 exchange. When done within the time limits, you can exclude up to $250,000 / $500,000 under the home-sale rules and defer the remaining gain into a replacement rental.
Timing matters. You still need two years of residence in the five years before the sale, so the sale generally has to happen within three years after you move out.
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Capital gains, depreciation recapture, and the extra ordinary tax a sale can trigger, with worked examples of how we run a before-and-after tax impact analysis.
The tax on selling a rental is more than one capital gains rate. The gain is split into pieces: depreciation you’ve claimed (or could have claimed) is taxed at up to 25%, the rest of the gain at 0%, 15%, or 20%, and higher-income sellers may owe the 3.8% net investment income tax. Colorado taxes the gain as ordinary income, and a large gain can push your other income into a higher bracket.
The only reliable way to know the real cost is to prepare your return twice, once without the sale and once with it, and compare. We’ve done this for clients where the sale added $19,000 in tax and others where it added more than $60,000.
Once you see the number, you can decide whether to sell, hold, or use a 1031 exchange.
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How the IRS treats a second home you use yourself, rent out, or both: the 14-day rule, splitting expenses between personal and rental use, and mortgage interest.
How a second home is taxed depends on how many days you rent it and how many days you use it yourself.
Rent it for 14 days or fewer during the year and the rent is tax-free; you don’t report it. Rent it more than that and the income is taxable, and your expenses have to be split between rental and personal days. If your personal use is more than 14 days, or more than 10% of the days it’s rented, rental deductions can’t exceed rental income.
Mortgage interest on a second home you use personally can be an itemized deduction, within the $750,000 total mortgage limit. When you sell, the home-sale exclusion generally doesn’t apply unless it was your main home.
Family, education & estate
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The American Opportunity and Lifetime Learning credits: who qualifies, which expenses count, the income limits, and how to coordinate the credits with 529 plan withdrawals and scholarships.
Two credits help with college costs. The American Opportunity Tax Credit is worth up to $2,500 per student per year for the first four years of college, and up to $1,000 of it is refundable. The Lifetime Learning Credit is worth up to $2,000 per return and covers graduate school, job-skills courses, and years beyond the first four.
Both phase out for incomes between $80,000 and $90,000 ($160,000 to $180,000 married filing jointly). Starting in 2026, the taxpayer and student need a Social Security number.
Coordination matters: the same expense can’t count for both a credit and a tax-free 529 withdrawal or scholarship. Planning which dollars pay which bills can increase the total benefit.
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The annual gift exclusion, when a gift tax return (Form 709) is required, the lifetime exemption, and how the tax basis of inherited property is determined.
Very few families owe federal gift or estate tax. For 2026 you can give up to $19,000 per person to as many people as you like without filing anything, and the lifetime exemption is $15 million per person ($30 million for a married couple). The 2025 tax law made the higher exemption permanent and indexed it for inflation.
Gifts above $19,000 to one person in a year require a gift tax return (Form 709), but usually no tax. The excess just uses up part of your lifetime exemption.
Income tax is often the bigger issue. Property you give keeps your original basis, while property someone inherits generally gets a basis equal to its value at death. That difference can matter more than the gift tax. Colorado has no estate or inheritance tax.
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Summer Day Camp Counts: The Child and Dependent Care Credit
Day care, preschool, after-school programs, and summer day camp can earn a credit worth up to $3,000 starting in 2026. Many families miss it.
One of our clients told us they had no idea summer camp and child care could reduce their taxes. That’s what this credit is for. If you pay for care so you and your spouse can work or look for work, you may qualify.
What counts: day care, preschool, before- and after-school programs, nannies and babysitters, and summer day camp, for children under 13 or for a spouse or dependent who can’t care for themselves.
What doesn’t: overnight camp, kindergarten and school tuition, and lessons such as tutoring or sports.How much. You can count up to $3,000 of expenses for one child or $6,000 for two or more. Starting with 2026 returns, the 2025 tax law raised the credit to as much as 50% of those expenses for lower-income families, so the credit can reach $1,500 or $3,000. Most families get 35% to 20%, depending on income. The credit reduces your tax but isn’t refundable.
Two things to watch:
- Dependent care FSA. If your employer offers one, the 2026 limit rises to $7,500. You can’t use the same dollars for both the FSA and the credit, so it’s worth figuring which works better.
- Records. You’ll need each provider’s name, address, and tax ID number, so ask for them when you pay, not in April. Paying a grandparent counts, as long as they aren’t your dependent.
Missed it on a past return? Returns can generally be amended for three years.
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When a Loved One Dies: Final Returns and Inherited IRAs
The tax filings after a death, the stepped-up basis on inherited property, and the 10-year rule for inherited IRAs.
Losing someone is hard enough without the paperwork. Here’s what usually needs to be done, and we can handle it for you.
The final return. A final Form 1040 is due by April 15 of the year after death, covering January 1 through the date of death. A surviving spouse can usually file jointly for that year. If the estate earns $600 or more of income, such as interest, dividends, or rent, while it’s being settled, it files its own return, Form 1041.
Inherited property. Property you inherit usually gets a “stepped-up” basis equal to its value on the date of death. If you sell soon afterward, there’s often little or no gain to tax. A surviving spouse who sells the home within two years of the death can generally still use the full $500,000 home-sale exclusion.
Inherited IRAs. This is where people make expensive mistakes.
- A spouse can roll the IRA into their own or keep it as an inherited IRA.
- Most other beneficiaries must empty the account by the end of the 10th year after the death. If the owner had already started RMDs, the beneficiary must also take annual withdrawals during those years, and missing one brings a penalty.
- Some beneficiaries get more time: minor children of the owner, disabled or chronically ill beneficiaries, and anyone not more than 10 years younger than the owner.
- Planning when to take the money over the 10 years can save a lot of tax, rather than taking it all at once or all in year 10.
Bring the death certificate, the last return filed, and any statements and 1099s. Related topics: Gift and Estate Taxes; Capital Gains Tax.
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The Child Tax Credit and the New Trump Accounts
The $2,200 Child Tax Credit, the new Social Security number rules, and how to claim the $1,000 Trump account deposit for children born 2025 through 2028.
Child Tax Credit. For 2026 the credit is $2,200 for each child under 17, and it’s now adjusted for inflation each year. Part of it, up to $1,700 per child, is refundable for families who owe little tax. It phases out above $200,000 of income for single filers and $400,000 for joint filers. Older children and other dependents can qualify for a $500 credit.
New rule: the child needs a Social Security number, and so does at least one parent claiming the credit.
Trump accounts. These are new investment accounts for children under 18, created by the 2025 tax law.
- $1,000 from the government. Children who are U.S. citizens, born in 2025, 2026, 2027, or 2028, and have a Social Security number can receive a one-time $1,000 deposit. It isn’t automatic: a parent must elect it on Form 4547, filed with your tax return, or at trumpaccounts.gov.
- Contributions started July 4, 2026. Family and others can put in up to $5,000 a year. Employers can contribute up to $2,500 tax-free, within that $5,000.
- Investments are limited to low-cost U.S. stock index funds, and the money generally can’t be withdrawn until the child turns 18.
Our take: if your child qualifies, claim the $1,000; it’s free money. Before putting in more of your own money, compare it with a 529 college plan or, once your child has a job, a Roth IRA. Those may offer better tax treatment depending on your goals. We can file Form 4547 with your return.
Small business
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How the IRS decides whether a side activity is a business, why hobby income is taxable while hobby expenses generally aren’t deductible, and the factors that tip the balance.
If you sell crafts, raise horses, breed dogs, or do photography on the side, the IRS will want to know whether it’s a business or a hobby. The difference matters: business expenses are deductible, and a business loss can offset other income. Hobby income is fully taxable, and hobby expenses aren’t deductible at all. The 2025 tax law made that permanent.
The IRS looks at whether you run the activity like a business: separate records and accounts, time and expertise invested, changes made to improve profitability, and a realistic expectation of profit. An activity that shows a profit in three of five years is presumed to be a business (two of seven for horses).
A few years of losses isn’t fatal, but you should be able to show a real plan for making money.
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Companion to The Box 2 Bermuda Triangle
Lost at Sea: Self-Employed Without Books
If you work for yourself, nobody withholds anything and nobody tracks your expenses but you. Without good bookkeeping, you are almost certainly paying tax on money you never kept.
$250–$400What every $1,000 of business expense you forget to deduct can cost you in self-employment tax and income tax.The Bermuda Triangle is what happens when employers forget to withhold. When you’re self-employed, there’s no employer at all. No withholding, no payroll department, and no one keeping track of what you spent to earn the money. On top of income tax you owe self-employment tax, 15.3% for Social Security and Medicare, because you’re both the employee and the employer.
Here’s the part most people miss: the IRS taxes your profit, not your gross receipts, and the only thing standing between the two is your records. Mileage, tools, supplies, your phone, software, a home office, health insurance premiums, retirement contributions. Every expense you can’t document is an expense you pay tax on as if it were profit. A client who walks in with a shoebox and a guess almost always leaves money on the table. Forget $8,000 of legitimate expenses and you could hand the IRS $2,000 to $3,000 you didn’t owe.
And if the IRS ever asks, a deduction without records is a deduction you lose, with penalties and interest added.
Bookkeeping is everything. Separate bank account and card for the business. Every receipt saved. A mileage log kept as you go, not reconstructed in April. Books brought up to date every month. When my tax clients need accounting and bookkeeping services, I recommend Admin Concepts.
And don’t forget the taxes themselves. Since nothing is withheld, you’re expected to pay quarterly estimated tax in April, June, September, and January. Good books tell you what your profit is, and your profit tells you what to send. If you’re already behind, we can help with that too, including an installment agreement filed with your return.
Also known as: The Shoebox Shipwreck · Receipts Overboard · Nobody Withholds for You
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Form 1099-K: Venmo, PayPal, Etsy, and eBay Income
Who gets a 1099-K from a payment app or online marketplace, the $20,000 reporting threshold, and why the income has to be reported whether a form shows up or not.
Venmo, PayPal, Cash App, Etsy, eBay, and other payment apps and marketplaces send Form 1099-K to people who are paid through them for goods and services. The IRS gets a copy too. The 2025 tax law set the reporting threshold back at more than $20,000 in payments and more than 200 transactions in a year, after the IRS had been phasing in much lower thresholds.
Here’s the catch: the threshold only decides whether you get a form. It doesn’t decide whether the income is taxable. If you sell goods or services, all of it needs to be reported on your tax return, whether you made $500 or $50,000 and whether or not a 1099-K ever arrives.
A 1099-K also shows your gross payments: every dollar that came through, before fees, shipping, the cost of what you sold, and your other expenses. The tax is on your profit, and the only way to show your profit is good records. (See Lost at Sea: Self-Employed Without Books.)
Not everything on a 1099-K is income. Splitting a dinner bill, paying back a friend, or getting a gift isn’t taxable, and selling your own used couch or clothes for less than you paid isn’t a taxable gain. But if those payments show up on a 1099-K, they still have to be accounted for on your return so the IRS doesn’t treat them as income. Bring the form to us and we’ll sort out what’s taxable and what isn’t.
Also known as: A Message in a Bottle from PayPal · The Venmo Undertow · Side Hustle, Front Page
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The four ways a business can be taxed, side by side: who pays the tax, self-employment and payroll tax, losses, liability, cost, and which one fits your business. Plus where an LLC fits in.
A sole proprietorship (Schedule C) is the simplest and cheapest, and a business loss offsets your other income, but you pay 15.3% self-employment tax on all your profit. A partnership (Form 1065) is the most flexible: partners can split income and losses unevenly, and property moves in and out without tax, which is why real estate belongs in one.
An S corporation (Form 1120-S) limits Social Security and Medicare tax to a reasonable salary, but it costs more to run and has strict ownership rules. We generally don’t recommend one until net income is consistently above about $100,000. A C corporation (Form 1120) pays a flat 21% itself, but profits paid out as dividends are taxed again. It makes sense mainly for businesses that reinvest, raise outside money, or plan to sell.
An LLC isn’t a tax type at all. It’s a legal shield, and the IRS taxes it as one of the four.
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How an S corporation saves Social Security and Medicare tax, what it costs to run one, the reasonable salary rule, and why we suggest waiting until your business nets about $100,000.
An S corporation is a tax election, not a different kind of business. Its main benefit: instead of paying 15.3% self-employment tax on all your profit, you pay yourself a reasonable salary through payroll, and Social Security and Medicare apply only to that salary. The rest comes to you as a distribution without those taxes.
The savings come with costs: a separate corporate return (Form 1120-S, due March 15), payroll, monthly deposits, quarterly 941s, unemployment taxes, and Colorado FAMLI premiums. Figure roughly $2,000 to $3,000 a year. Here’s a rough look at savings before those costs:
Net business income Savings before added costs $60,000 About $1,300 $100,000 About $3,700 $150,000 About $7,400 That’s why we generally recommend an S corporation only once your Schedule C net income is consistently above about $100,000. Keep in mind that paying less into Social Security now means a smaller Social Security check later.
Setting one up is a legal job too. Ownership, operating agreements, and buy-sell agreements done wrong can end the S election. We often refer clients to Tyler Murray of Murray & McCarthy Law in Denver for the formation, and we handle the tax side.
Tax law & planning
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Our biggest planning article: ways to save for working families, taxpayers 65 and older, investors, people giving to family or charity, and parents paying for school. Figures current as of October 1, 2026.
Most tax savings come from decisions made during the year, not at filing time. This article collects the ones we see make the biggest difference, with the 2026 numbers for each:
- Working families. Health and dependent care FSAs (the dependent care limit rose to $7,500 for 2026), the child care credit, whether a second paycheck really pays, and head of household status for people supporting a parent or relative.
- Taxpayers 65 and older. The new $6,000 senior deduction, deducting Medicare premiums, paying a parent’s medical bills, continuing care community fees, giving to charity from your IRA (QCDs), and Colorado’s retiree breaks.
- Retirement accounts. 2026 contribution limits, early withdrawals without the 10% penalty, rollover traps, and the 10-year rule for inherited IRAs.
- Investors. The 0% capital gains bracket, gifting appreciated stock, the kiddie tax, harvesting losses, the $40,400 SALT cap, and the new charitable deduction rules.
- Gifts, estates, and education. The $19,000 gift exclusion, the $15 million estate exemption, 529 plans, employer help with student loans, and why student loan forgiveness is taxable again.
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Why tax planning is hard when laws change, provisions expire, and IRS guidance lags, and practical ways to plan around what isn’t settled yet.
Tax planning would be simple if the rules held still. They don’t. Congress passes major changes every few years, many provisions have expiration dates, IRS guidance on new rules often arrives months later, and Colorado doesn’t always follow federal changes.
Right now, the new deductions for tips, overtime, car loan interest, and seniors run only through 2028, and the higher SALT cap drops back to $10,000 in 2030.
The practical answer is to plan for the rules you know, keep flexibility for the ones you don’t, and review your situation each year before December 31, not just at filing time.
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Capital Gains Tax: How Your Gains Are Taxed
Short-term versus long-term gains, the 2026 rates, and why many people pay 0%.
When you sell stock, real estate, or other investments for more than you paid, the profit is a capital gain. How it’s taxed depends mostly on how long you owned the asset.
- Short-term (one year or less) gains are taxed like wages, at your ordinary rate.
- Long-term (more than one year) gains get lower rates:
2026 rate Single Married filing jointly 0% Taxable income up to $49,450 Up to $98,900 15% Up to $545,500 Up to $613,700 20% Above $545,500 Above $613,700 Those thresholds are based on your total taxable income, including the gain. Many retirees and moderate-income families pay nothing on long-term gains and don’t know it. A married couple with $80,000 of taxable income, including a $20,000 long-term gain, owes 0% federal tax on that gain.
Other things that matter:
- Basis. Your gain is the sale price minus your basis, which is generally what you paid plus improvements. Inherited property usually gets a “stepped-up” basis to its value at the date of death. Gifted property keeps the giver’s basis.
- Losses offset gains, and up to $3,000 of excess loss a year can offset other income, with the rest carried forward.
- Rental property has an extra layer: depreciation you took is taxed at up to 25% when you sell.
- Net investment income tax. An extra 3.8% applies when income exceeds $200,000 single or $250,000 joint.
Colorado taxes capital gains as ordinary income at its flat rate. Related topics: Selling Your Home, Selling a Rental Property, 1031 Property Exchanges.
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Colorado Credits for 2026: What Changed
Several Colorado credits shrink or pause for 2026, and no TABOR refund is expected. Here’s what to plan for.
Colorado ties several credits to how fast state revenue is growing, and slower growth means smaller credits for 2026, the return you’ll file in 2027.
- Colorado earned income credit. Still available, but cut from 50% of the federal credit to 25% for 2026. A family whose federal EITC is $4,000 would see a Colorado credit of about $1,000 instead of $2,000.
- Family Affordability Tax Credit. Paused for 2026. Families who received it the last two years won’t see it on their 2026 return.
- Colorado Child Tax Credit. Still available for children under 6, for families under the income limits.
- TABOR refund. None is expected for 2026, because state revenue is projected to fall below the TABOR cap.
Why it matters: if your refund last year included these credits, your 2026 refund may be noticeably smaller even if nothing else changed. Plan for it now rather than being surprised in April.
What hasn’t changed: retirees 65 and older can still subtract all federally taxed Social Security on their Colorado return, and Colorado still offers credits for child care expenses for families who qualify.
Colorado’s own forecasts expect these credits to return in later years. We’ll keep this topic updated. (See also The Earned Income Tax Credit.)
Getting started
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Here All Year, Not Just Tax Season
Plenty of tax offices open in January and disappear after April. Tax Shop is a local, year-round part of the community. Here’s what we help with the rest of the year.
Tax Shop goes back to 1969, when my mother, Chloe, opened her tax office, and we’ve been part of the community ever since. Today we’re on the second floor of the Panera Bread building in Lone Tree, just south of Park Meadows Mall. We think of ourselves as a community asset: a locally owned, independent office people can count on, built on referrals from clients telling friends and family rather than big advertising.
During tax season a team of experienced preparers works with me. The rest of the year, you reach me directly, the Enrolled Agent who signs every return. Tax questions don’t keep a calendar, and neither do we. Between May and December we help with:
- IRS and Colorado letters. Notices, balance-due letters, and questions about a return. Don’t ignore them; most are simple to resolve when handled promptly.
- Overdue and prior-year returns. Whether it’s one year or several, we can get you caught up. (See Unfiled & Overdue Tax Returns.)
- Amended returns. If something was missed, such as an HSA deduction, returns can generally be corrected for three years.
- Extended returns, due in mid-October.
- Withholding and estimated tax checkups. The best time to avoid a surprise bill is before the year ends. (See The Box 2 Bermuda Triangle.)
- Planning before a big decision. Selling a home or rental property, starting a business, changing jobs, or retiring. A call before you act is often worth more than anything we can do afterward.
Meet in person at our office or work with us remotely through our secure document portal. Call 303-734-1040 or email 1040@taxshop.tax, any month of the year.
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Your Annual Tax Organizer
A checklist of the documents and information we need to prepare your return, with the 2025 organizer to download.
Our tax organizer is a checklist of the documents and information we need to prepare your return. It’s especially helpful if anything changed during the year. Filling it in isn’t required, but it saves time and helps make sure nothing is missed.
Bring or upload:
- Last year’s tax return, if we didn’t prepare it
- W-2s, 1099s (interest, dividends, brokerage, retirement, Social Security, unemployment, gig and contract income), and K-1s
- Form 1098 (mortgage interest), property tax statements, and 1098-T (tuition)
- Records of charitable gifts, medical expenses, child care costs, and estimated tax payments
- Business and rental income and expenses
- Records of property bought or sold, and any IRS or Colorado letters
- Health insurance Form 1095-A if you bought coverage through Connect for Health Colorado
Call 303-734-1040 or email 1040@taxshop.tax to request a link to your secure document portal for uploading your documents.
Have a question you’d like to see covered? Call us at 303-734-1040 or email 1040@taxshop.tax.
Disclaimer
Each article on this page is provided by Tax Shop for general informational purposes only. It is not tax, legal, accounting, or investment advice, and it should not be relied on as a substitute for advice from a qualified professional who knows the facts of your situation.
Tax laws, IRS guidance, limits, and deadlines change often. Each article on this page reflects the law as we understood it on the date shown, and we do not undertake to update it after it is published. Information may be incomplete, may not apply to your circumstances, or may be affected by state law.
Reading each article on this page, or contacting us through this website, does not create a client or professional relationship with Tax Shop. A professional relationship begins only when we agree in writing to provide services to you.
Before acting on anything you read here, please consult your tax professional. Tax Shop is not responsible for any loss, penalty, or tax resulting from actions taken or not taken based on this information. Links to outside websites are provided for convenience; we do not control and are not responsible for their content.