Code "J" is actually correct for your situation. It specifically indicates an early distribution from a Roth IRA that is not subject to penalty (due to it being a qualified distribution). This is different from OP's situation with a Traditional to Roth conversion. Distribution codes can vary based on the specific type of transaction and account types involved. For a backdoor Roth where you contribute to a Traditional IRA and then convert to Roth, you'd typically see code "2" (or sometimes "1" as in OP's case) for the conversion step. But for distributions from Roth IRAs themselves, different codes apply.

Is that really necessary though? Seems like overkill for a piece of forest land in the middle of nowhere. What kind of insurance would even cover that?

This is really helpful info about the Wisconsin MFL program! I had no idea forest land could qualify for such significant tax reductions. @Katherine Ziminski, do you know if there are any restrictions on access or use of the land while it's enrolled in the MFL program? Like, can you still hike on it or allow family to use it recreationally, or does keeping it as "managed forest" mean you can't really use it at all?

But the equipment deduction would reduce that net profit right? So if they spent $10,500 on the excavator and only make $8,000 in revenue the first year, they wouldn't owe SE tax?

Exactly right! The equipment deduction reduces your net profit, which is what SE tax is calculated on. So in your example, if they made $8,000 in revenue but had $10,500 in equipment expenses, they'd actually have a net loss of $2,500 for the year. No SE tax owed on a loss. Just keep in mind that having losses multiple years in a row can trigger IRS scrutiny about whether it's really a business or just a hobby. But for a startup year, especially with major equipment purchases, losses are totally normal and expected.

This is really solid advice! I'm just getting started with understanding business taxes myself, but the documentation part makes so much sense. Even something as simple as screenshots of Craigslist or Facebook posts where you're advertising your services could probably help show business intent, right? I hadn't thought about the insurance angle either - that's a great point about clients requiring liability coverage. Do you know if there are any other "must have" insurances for this type of work that would also be deductible?

@Nia Wilson Yes, absolutely! Screenshots of ads, even saved drafts of Craigslist posts you re'working on, text messages with potential clients, photos of you researching competitor pricing - all of that helps build your case for legitimate business intent. For insurance, beyond general liability, you ll'probably want to look into equipment coverage for the excavator itself theft, (damage, etc. and) potentially commercial auto if you re'using a truck/trailer to transport it to job sites. Some excavation work might also require bonding depending on your local regulations and the types of clients you work with. All of those premiums would be deductible business expenses. One more tip - if you re'planning to work your excavator from your home base, check if you need any local business permits or licenses. Getting those early not only keeps you compliant but also creates more documentation of your serious business intent.

How accurate did you find the IRS estimator? I tried using it but got confused with all the info they wanted. Did you feel like your withholding ended up being accurate using their recommendation?

I found the IRS estimator to be pretty accurate, but it does require a lot of detailed information. You need your most recent paystubs for both you and your spouse, plus any other income sources. The results were accurate for us - we got a small refund of about $650 which was perfect. The key things that made it work well were making sure we entered our pay frequency correctly (biweekly vs. semi-monthly makes a difference) and updating it mid-year when I got a raise. If your incomes are stable, you probably only need to do it once, but any big changes warrant a re-calculation.

Thanks for bringing this up! We're actually planning to put our baby in daycare once my wife's maternity leave ends. I had no idea about the Child and Dependent Care Credit. Does that get factored into the W-4 somehow or is it just something we claim when we file next year?

The Child and Dependent Care Credit is only claimed when you file your tax return - it doesn't affect your W-4 withholding at all. However, if you're planning on significant daycare expenses, you might want to consider adding a small amount to your additional withholding in Step 4(c) of your W-4 since the credit phases out at higher income levels and you want to make sure you don't underwithhold. Also, definitely look into the Dependent Care FSA that @53dc090fcbaf mentioned! You can set aside up to $5,000 pre-tax for childcare expenses, which reduces your taxable income. Just be careful not to contribute more than you'll actually spend since FSA funds typically have a "use it or lose it" rule.

This is really comprehensive advice! I'm curious about point #4 regarding professional help - do you have any recommendations for finding tax professionals who specifically handle international inheritance issues? I've called a few local CPAs but they seem hesitant to take on foreign property cases. Also, regarding the documentation you mentioned, should we be getting official translations of foreign documents, or are copies of the original documents sufficient for IRS purposes?

Great question about finding qualified professionals! For international tax specialists, I'd recommend checking the American Institute of CPAs (AICPA) directory and filtering for "international taxation" specialization. You can also look for Enrolled Agents (EAs) who often handle complex IRS matters. Many larger firms have international tax departments even if the local partners don't advertise it. Regarding documentation, the IRS generally accepts foreign documents in their original language for amounts under certain thresholds, but having certified translations can save you headaches if they request clarification. For estate valuations and property appraisals, I'd definitely get key documents translated since these establish your basis. Keep both originals and translations together. One more tip - if the foreign country required you to file tax returns there as part of the inheritance/sale process, keep copies of those too. They can help support your foreign tax credit claims and show the IRS you were compliant with foreign tax obligations.

This is exactly the kind of detail that gets overlooked! Thank you for bringing up Form 3520 - I had no idea about this requirement. The $220,000 total definitely puts us over that $100,000 threshold. Quick follow-up question: since the inheritance and sale happened in different years (inheritance in 2023, sale in 2024), do we need to file Form 3520 for both tax years? Or just for 2023 when the actual inheritance occurred? And is there any interaction between Form 3520 and the capital gains reporting on Schedule D, or are they completely separate requirements? The penalty structure you mentioned sounds terrifying - definitely want to make sure we don't miss this!

Great question about the timing! Since your wife inherited the property in 2023, you should file Form 3520 with your 2023 tax return (or amend if you already filed without it). The form is required for the year you received the inheritance, not when you sold it. So you'd file Form 3520 for 2023 and report the capital gains on Schedule D for 2024. These are completely separate requirements - Form 3520 is just informational reporting about receiving the foreign inheritance, while Schedule D reports the taxable gain from selling it. Think of Form 3520 as telling the IRS "I received this foreign inheritance" and Schedule D as "I sold inherited property and here's my gain/loss." The penalties are indeed severe, so definitely don't delay on this. If you haven't filed your 2023 return yet, include Form 3520. If you already filed 2023 without it, you'll want to amend using Form 1040X. The sooner you get compliant, the better your position will be if the IRS has any questions.