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Dont forget to check if u need to include any earnings/losses that happened during the recharacterization period too!! When I did mine last yr, the amount that moved from roth to traditional was more than my original contribution because of some gains, and that affected how I reported it on form 8606. turbotax was a bit confusing on this part tbh.
Yes! This is so important. I actually had the opposite with losses during the recharacterization period, and it caused all kinds of confusion. If your original contribution was $6,000 but only $5,700 got moved due to investment losses, you need to account for that correctly.
I went through a very similar situation last year and it really is confusing! One thing that helped me was understanding the timeline clearly: since you made the 2023 contribution in 2024 (before April 15) and then recharacterized it in 2024, both actions affect your tax reporting. You'll definitely need to file Form 8606 for 2023 to report the nondeductible Traditional IRA contribution (since that's what it became after recharacterization). The key thing I learned is that the recharacterization is treated as if the money went directly to the Traditional IRA from the beginning - so it never "counts" as a Roth contribution for tax purposes. For your 2024 return, you'll report the recharacterization itself. TurboTax should handle this when you enter your 1099-R information, but make sure you have all the documentation from your IRA custodian showing the proper recharacterization codes. I'd recommend getting your custodian statements that show exactly what happened and when, because the timing and proper documentation is crucial for reporting this correctly. The good news is once you get through this year, future backdoor Roth conversions will be much more straightforward!
This is really helpful, thanks! I'm still wrapping my head around the "treated as if it went directly to Traditional IRA" concept. So even though I initially put the money into a Roth IRA, for tax purposes it's like I never made a Roth contribution at all? And when you mention getting custodian statements - what specific documents should I be looking for? I have the 1099-R with code R that someone mentioned earlier, but are there other forms or statements I need to make sure I have before filing? I want to make sure I don't miss anything since this whole process has been such a learning experience!
I'm an Enrolled Agent and see this situation frequently with contractors and mobile service businesses. Here's what you need to know: 1) Employee snacks and beverages like you're describing are typically 100% deductible as de minimis fringe benefits, even when not provided at a traditional office. 2) The key distinction is between "snacks/refreshments" vs "meals" - if you're buying actual meals (like hot food from the deli counter), those would likely fall under the 50% limitation. 3) Document, document, document! Note on receipts: date, business purpose, who received the items. 4) Be reasonable with amounts - $5-10 per employee for snacks/drinks won't raise eyebrows, but large amounts might trigger questions. 5) Consider setting up a specific credit card just for these purchases to make tracking easier. Hope that helps! The mobile nature of your business doesn't eliminate deductions that would be available in a traditional office setting.
What about if the owner (me) also partakes in these snacks? Does that change anything? Like if I buy a round of drinks for me and my 2 employees, is my portion treated differently?
Great question! If you're participating in the snacks/drinks as the owner, it gets a bit more complex. Generally, the portion you consume as the owner wouldn't be deductible since you can't provide fringe benefits to yourself as a sole proprietor. However, in practice, if you're buying snacks for the group and occasionally having some yourself, most practitioners would still treat the entire purchase as a deductible employee benefit expense as long as the primary purpose is for your employees. The key is that it should be predominantly for employee benefit, not personal consumption. If you want to be extra cautious, you could either exclude your portion from the deduction or keep track of what percentage you consume vs. your employees. But honestly, for small convenience store purchases like this, the administrative burden usually isn't worth it unless the amounts are significant. Just maintain that business purpose documentation - "employee refreshments after job completion" or similar notes on receipts.
This is really helpful information everyone! I run a small plumbing business and face the exact same situation - always on the road with my crew and grabbing drinks/snacks to keep morale up during long days. One thing I'd add from my experience: if you're doing this regularly, consider getting a business credit card specifically for these employee-related expenses. It makes tracking so much easier at tax time, and you can set spending limits if needed. Also, don't forget that if you're providing these snacks consistently, your employees might need to report them as income if they exceed the IRS de minimis thresholds. But for occasional convenience store runs like you're describing, that's usually not a concern. Keep doing what you're doing - happy employees are productive employees, and the IRS recognizes legitimate business expenses for employee benefits even in mobile work situations.
That's a smart idea about the separate business credit card! I've been mixing these purchases with my personal card and it's a nightmare trying to sort everything out. Quick question though - when you mention the de minimis thresholds for employees having to report as income, what's that dollar amount? I want to make sure I'm not accidentally creating a tax burden for my guys by being too generous with the snacks.
This thread has been incredibly helpful! As someone who just became a partner in a small business this year, I was completely lost on these concepts. One thing I'm still confused about - my K-1 shows a negative capital account balance. How is that even possible? I contributed $25,000 initially and we've been profitable, but somehow my capital account is showing -$8,000. The partnership has some equipment loans, but I thought debt was supposed to help my basis, not hurt my capital account? Also, is there a difference between what shows up on the K-1 as my capital account and what I should be tracking for tax basis purposes? I feel like I'm missing something fundamental here.
A negative capital account can definitely happen and it's more common than you might think! It usually occurs when the partnership has taken distributions or allocated losses that exceed your initial contribution plus any allocated profits. The debt helps your outside basis (for tax purposes) but doesn't directly affect your capital account balance. Here's the key distinction: your capital account on the K-1 tracks your economic interest in the partnership under book accounting rules, while your outside basis (for tax purposes) includes your share of partnership liabilities. So you could have a negative capital account but still have positive tax basis if your share of partnership debt is large enough. For example, if you contributed $25K, the partnership allocated $10K in losses to you, and you took $23K in distributions, your capital account would be $25K - $10K - $23K = -$8K. But if your share of partnership debt is $20K, your outside basis for tax purposes would be positive ($25K - $10K - $23K + $20K = $12K). The negative capital account just means that if the partnership liquidated today at book value, you'd owe money back rather than receive a distribution. But for tax basis and loss deduction purposes, what matters is your outside basis calculation.
This has been such an educational thread! I'm dealing with a similar K-1 situation and have been going in circles trying to understand these concepts. One thing that's really helping me is keeping separate worksheets for my capital account reconciliation versus my outside basis calculation. They're related but definitely not the same thing, as several people have pointed out. For anyone still struggling with the inside vs outside basis concept, I found it helpful to think of it this way: inside basis is what the partnership thinks its assets are worth for tax purposes, while outside basis is what YOUR interest in the partnership is worth for YOUR tax purposes. They can diverge because of timing differences in when income/losses are recognized, different depreciation methods, or various elections the partnership makes. The debt aspect that @Chloe Anderson and @Declan Ramirez mentioned is crucial - I didn't realize that even nonrecourse debt could increase my basis until I started tracking everything more carefully. It's definitely worth creating that quarterly tracking system rather than trying to reconstruct everything at year-end!
This is exactly the kind of systematic approach I wish I had started with! The separate worksheets idea is brilliant - I've been trying to track everything in one place and getting confused about which numbers apply where. Your explanation about inside vs outside basis being different perspectives (partnership's view vs your personal tax view) really clicked for me. I think I was getting hung up trying to make them match when they're supposed to serve different purposes. Quick question - when you're doing your quarterly tracking, do you include estimated basis adjustments for things like depreciation pass-throughs, or do you wait for the actual K-1 numbers? I'm trying to figure out how detailed to get with the interim tracking versus just using it as a rough checkpoint.
This is a great question that trips up a lot of people! The SALT deduction cap is one of the most confusing parts of the current tax code. Just to add some context to the excellent explanations already given - the reason you're seeing such a dramatic difference between 2024 and 2025 is likely because: 1. You mentioned buying a house in late 2024, so 2025 is your first full year of property tax payments 2. Property taxes can easily be $15k-25k+ annually depending on your location and home value 3. Combined with state income taxes, this quickly pushes you over the $10k cap One thing to keep in mind is that this SALT cap is currently set to expire after 2025, so it may not be a permanent limitation. However, nothing is guaranteed until Congress acts. Also, make sure you're not double-counting any property taxes that might have been prorated at closing - those should only be deducted once, in the year you actually paid them to the tax authority (not necessarily when they were due).
This is really helpful context! I hadn't thought about the timing aspect with the property tax proration at closing. When I bought my house in December 2024, there were some property tax adjustments on the closing statement - should I be looking at what I actually paid to the county versus what was shown on the closing docs? Also, it's good to know the SALT cap might expire after 2025. Do you know if there's any indication from Congress about whether they'll extend it or let it expire? This would make a huge difference for my tax planning going forward, especially since I'm probably going to be hitting this cap every year now as a homeowner.
For the property tax proration question - you should deduct what you actually paid to the taxing authority (county/municipality), not what appeared as adjustments on your closing statement. At closing, you and the seller typically split the annual property tax bill based on how many days each of you owned the property that year. The closing statement shows this proration, but only the amounts you actually paid to the tax collector are deductible. As for the SALT cap expiration, Congress hasn't made any definitive moves yet, but there's been discussion from both parties about addressing it. Some want to eliminate the cap entirely, others want to raise it, and some want to extend it as-is. With it expiring after 2025, we'll likely see more concrete proposals as we get closer to the deadline. For planning purposes, I'd prepare for both scenarios - having the cap continue and having it expire - since the political winds can change quickly on tax policy.
One thing that might help clarify the SALT situation is understanding that the $10,000 cap is per tax return, not per person. So if you're single, you get $10,000. If you're married filing jointly, you still only get $10,000 total (not $10,000 each). This is why some married couples consider filing separately - each spouse could potentially claim up to $10,000 in SALT deductions on their separate returns. Also, since you mentioned using FreeTax USA, make sure you're looking at the right forms. Your total SALT taxes paid will show up on the detailed worksheets, but only up to $10,000 will actually flow through to your Schedule A as a deduction. The software should clearly show both numbers - what you paid versus what you can deduct. Given that you bought a house in late 2024, you're probably going to be dealing with this cap for the foreseeable future. It might be worth tracking your quarterly estimated state tax payments and property tax payments throughout the year so you can plan ahead for next year's filing.
Jason Brewer
Just wondering, does your dad's tax preparer work at a major chain or are they independent? I worked at one of the big tax prep companies and we had specific training on dependent tests. This mistake seems really basic for a professional.
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Justin Chang
β’It's a small local office, not a major chain. The preparer has been doing my dad's taxes for years, but I get the impression they're more focused on keeping clients happy than following tax law precisely.
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Kiara Fisherman
β’Not the OP but former tax preparer here. You'd be shocked at how many small tax offices get the dependent rules wrong. They often go by older rules or simplified versions. The qualifying child vs qualifying relative tests trip up a lot of preparers, especially the income tests which changed a few years back.
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Lena MΓΌller
This is definitely a frustrating situation, but you're absolutely right to question this. The tax preparer is incorrect about the income limits for dependents your age. Since you're 21 and not a student, the income test for qualifying child status is $4,700 for 2024 - not the standard deduction amount. Your income of $12,630 far exceeds this limit, so you cannot be claimed as a qualifying child dependent. For qualifying relative status, your father would need to provide more than half of your total support for the year. Given your income level, this seems unlikely unless you had very high expenses that he covered. Here's what I'd recommend: 1. Don't sign any tax documents that list you as someone else's dependent 2. Show your father and his tax preparer the official IRS Publication 501 which clearly outlines these rules 3. Request that your father file an amended return (Form 1040-X) to remove you as a dependent 4. File your own return claiming yourself If your father refuses to amend his return and you file correctly claiming yourself, the IRS will send correspondence to both of you to resolve the duplicate claim. You won't be penalized for filing correctly, but be prepared to provide documentation of your income and support situation. Don't let anyone pressure you into filing incorrectly just to avoid conflict. The rules are clear, and you have every right to claim your own exemption.
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Eve Freeman
β’This is really helpful advice, thank you! I'm definitely not going to sign anything that claims me as a dependent. Do you happen to know if there's a specific deadline for filing an amended return? I'm worried my dad might try to drag this out until it's too late to fix properly.
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