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Questions about Converting Non-Deductible Traditional IRA to Roth IRA - Handling Pro-Rata Rule and Form 8606 Correctly
I'm trying to figure out how to convert my non-deductible traditional IRA to a Roth and want to make sure I don't mess anything up with the Pro-Rata Rule and Form 8606. Here's what I'm working with: - Made two contributions of $7,500 each in 2022 and 2023, totaling $15,000 in non-deductible contributions - My traditional IRA's current value is only about $13,700 (ugh, market hasn't been kind) - This is literally my only traditional IRA. Rest of my retirement money is split between my 401(k), HSA, an Inherited IRA from my grandparent, and some stocks in a regular brokerage account My main questions: 1. Will my wife's traditional IRA affect the pro-rata rule calculations for my conversion? I'm thinking no, but want to be 100% sure. 2. When I fill out Form 8606 for the 2025 tax year, would my basis end up being $0 since I'm converting everything at a loss (around $1,300 less than I put in)? 3. Are there any gotchas or things people typically overlook with this kind of conversion? Don't want the IRS sending me nasty letters. Thanks in advance for any help! This tax stuff makes my head spin.
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How to file taxes with a 1096 form - first time filer question
Hey guys, I'm seriously confused about how to handle my taxes this year. This is my first time filing with a 1096 form and I'm not sure how to proceed. I normally use TurboTax for everything, but they don't seem to have an option to submit the 1096 form online through their system. I know I need to mail the 1096 to the IRS, but I'm completely lost on how this affects my overall tax situation. When I run the numbers in TurboTax WITHOUT accounting for the stuff on my 1096, I get about a $950 refund. But when I include the income that I'm trying to write off (without the 1096 being properly accounted for), I end up owing around $1,500! Do I just pay the $1,500 to the IRS, send in my 1096 separately, and then wait for them to refund me after they process everything? Or am I supposed to send in the 1096 first and then somehow TurboTax will be able to figure out the real amount I owe after those write-offs? I'm completely lost and don't want to mess this up!
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Just to add some clarity since there still seems to be confusion: Form 1096 = A transmittal form (cover sheet) that businesses use when sending copies of information returns (like 1099s) to the IRS. You only need this if you paid contractors and need to report those payments. Schedule C = The form self-employed people use to report business income and claim expenses. This is part of your personal tax return. If you're self-employed and trying to deduct expenses, you need Schedule C, not Form 1096. TurboTax definitely handles Schedule C - it's one of the most common forms for self-employed individuals.
So if I'm a freelancer and I get 1099s from my clients, I don't need to worry about Form 1096 at all, right? I just report the income on Schedule C?
That's exactly right! When you're the contractor receiving 1099s, you just report that income on your Schedule C. You can also deduct your eligible business expenses on that same form. The 1096 is only for people on the other side of the transaction - the businesses that paid you and issued those 1099s. They use the 1096 as a cover sheet when sending copies of your 1099 to the IRS. As the recipient of 1099s, you never need to worry about Form 1096.
TurboTax actually has a good system for handling self-employment income and expenses. When you start the process, make sure you indicate that you have self-employment income. It will then guide you through the Schedule C section where you can enter all your business income and expenses. If you're not seeing this section, you might need to upgrade to the Self-Employed version of TurboTax. The basic versions don't always include Schedule C preparation.
Is the Self-Employed version worth the extra cost though? I've heard mixed things.
I've been using the Self-Employed version for three years now and it's definitely worth it if you have any business income or expenses. The guided interview process walks you through all the Schedule C sections and helps you identify deductions you might miss otherwise. It also includes quarterly estimated tax calculations which is super helpful for planning. The basic version will just tell you that you need to upgrade when you try to enter business info, so you end up paying for it anyway if you're self-employed.
Can I skip Schedule C deductions to maximize Solo 401k contributions for my small business?
I have a small bookkeeping business that's my only source of income right now. I'm trying to figure out the smartest way to handle my taxes and retirement savings, and I'm wondering about Schedule C deductions versus maximizing my Solo 401k. Here's my situation: * I make about $20,000 per year from my bookkeeping clients * I spend roughly $4,000 annually on QuickBooks and other software * I want to contribute as much as possible to my Solo 401k I'm considering two options: Option 1: * $20,000 Income from bookkeeping * Claim $4,000 in business expenses on Schedule C * Solo 401k contribution: $16,000 * Net taxable income: $0 Option 2: * $20,000 Income from bookkeeping * Claim $0 in business expenses (just pay them out of pocket) * Solo 401k contribution: $20,000 * Net taxable income: $0 Either way, there's no tax liability since the income is below the Solo 401k contribution limits. But am I actually required to claim all legitimate business expenses on my Schedule C? I'd rather maximize my retirement contributions and just cover my business expenses with cash. Is this allowed or do I have to deduct everything?
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Has anyone actually checked if not claiming legit business expenses could trigger an audit? I've always been told that the IRS algorithms flag returns that don't match expected patterns for your industry. Like if most bookkeepers claim around 20-30% expenses but you claim zero, wouldn't that look weird?
Tax preparer here (not a CPA). The IRS does use a system called the Discriminant Information Function (DIF) that scores returns based on averages for your industry. Extremely low expenses can potentially raise your DIF score, but it's just one of many factors. Generally, understating deductions is less likely to trigger an audit than overstating them, but significant deviations from industry norms in either direction can increase scrutiny.
I think you're overcomplicating this. The math is pretty straightforward - you should always claim your legitimate business expenses because of the self-employment tax implications that others have mentioned. Here's why: In your Option 1, you'd have $16,000 in net earnings subject to SE tax (15.3%), which is about $2,448 in SE taxes. In your Option 2, you'd have $20,000 in net earnings subject to SE tax, which is about $3,060 in SE taxes. That's an extra $612 you'd be paying unnecessarily. Plus, your Solo 401k contribution limits are based on your net self-employment earnings anyway, so claiming legitimate expenses doesn't actually hurt your contribution capacity - it just makes your tax situation more accurate and saves you money on SE taxes. The IRS doesn't care if you don't claim every possible deduction, but why would you voluntarily pay more taxes than you legally owe? Take the deductions you're entitled to, pay the correct amount of SE tax, and then contribute what makes sense to your Solo 401k based on your actual net earnings.
2025 EITC/ACTC Refund Schedule: February 19-20 Batches with IRS Updates on February 17
Just got the details from Jackson Hewitt about PATH Act refunds for 2025. According to their website, if you claimed either the Earned Income Tax Credit (EITC) or Additional Child Tax Credit (ACTC), the IRS has to hold the refund until after February 14 due to the Protecting Americans from Tax Hikes (PATH) Act - this is to prevent tax fraud. I was looking at their webpage titled "PATH Act Refund Delays: When to Expect" and it breaks down all the key takeaways: "The Protecting Americans from Tax Hikes (PATH) Act requires the IRS to hold refunds for taxpayers who claim the Earned Income Tax Credit (EITC) or Additional Child Tax Credit (ACTC) until after February 14, in order to prevent tax fraud. The IRS will update its website and app on February 17, 2025, with refund updates for early filers who claimed the EITC or ACTC. PATH funding will be done in two batches, on February 19 and February 20, 2025. Most of the time, the IRS will fund tax refunds within 21 days, but does not guarantee a certain date. The IRS will lift the PATH Act holding requirement on February 17, 2025, and fund most refunds of taxpayers claiming either the EITC or ACTC by February 28, 2025." They're making it clear that the PATH funding will be released in those 2 specific batches - February 19 and February 20, 2025. The IRS website and app will update with refund info for early filers who claimed EITC or ACTC on February 17, 2025. Jackson Hewitt also mentions: "You don't have to wait for the IRS to get money. File with Jackson Hewitt and apply for a No Fee Tax Refund Advance loan, and you could get money the same day if approved on a prepaid card." They even have a promotion saying "NEW CLIENTS save money on expert tax prep. Starting at $49! Terms apply." If you claim the EITC or ACTC on an early filed return, the IRS puts a hold on your refund for a special review to make sure you report these credits correctly. I know these credits are important for families, but this holding period is frustrating and ridiculous. The webpage acknowledges how important tax refunds are for families. Anyone else stuck waiting on PATH refunds? I understand they need to prevent fraud, but making families wait until late February when many people file in January seems excessive.
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used taxr.ai last year and it was spot on with my refund date. Already used it this year too and its showing Feb 20 deposit for me lets gooooo
Does it work with amended returns too?
yep! it can read any transcript type and explains everything in normal human words lol
This is so helpful! I filed early January with H&R Block and claimed both EITC and ACTC. Been stressing about when I'll actually see my refund. The February 17th update date and Feb 19-20 batch releases give me something concrete to look forward to instead of just "sometime after Feb 14th." Really appreciate you sharing the Jackson Hewitt breakdown - makes it way clearer than the confusing IRS language. Still think it's ridiculous that families have to wait this long when we need the money for bills and expenses, but at least now I know exactly what to expect and when. Gonna mark my calendar for Feb 17th to check WMR!
Tax Refund Direct Deposit Delay with Credit Karma - Anyone Else Waiting?
What's happening with my refund? Filed January 26th. Still no deposit. I usually get deposits between 11:30 am & 12:30 pm. Everyone yesterday got theirs by noon. Why the long wait? Anyone else with January 26th filing date still waiting? Please check in. I need this money. Called IRS twice. No help. Transcript shows approved. Credit Karma shows nothing. UPDATE: Mine finally hit @ 4:35pm eastern NJ. Relief!
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This happens every tax season with Credit Karma! 😂 They're consistently about 4-6 hours behind traditional banks on the deposit day. Think of it as the tax refund fashionably late to its own party. I've been tracking this pattern for three years now, and it's pretty predictable. Don't worry - your money isn't lost in the void. Credit Karma just likes to build suspense before making it rain! Hang in there, it'll show up today.
I'm going through the exact same thing! Filed on January 27th and my transcript shows the 846 refund issued code for today, but still nothing in my Credit Karma account as of 2pm EST. This is my first year using Credit Karma for direct deposit and I'm definitely learning that their timing is different from what I expected. Reading through everyone's experiences here is actually really reassuring - sounds like late afternoon deposits are pretty normal for them. Thanks for the update that yours finally came through at 4:35pm, that gives me hope mine will hit soon too!
Connor Murphy
Small thing to consider that I haven't seen mentioned yet - if you're converting at a loss like you are, you may want to check which investments caused the loss and see if there's any benefit to harvesting the loss in your taxable account instead (if you hold the same funds there). Since you can't deduct the IRA loss, sometimes it makes sense to sell the losers in your taxable account for the tax benefit, then convert the IRA when it's recovered a bit. Though with the current market being so high, that might not be feasible.
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Giovanni Colombo
AuthorI hadn't thought about that angle! I do hold some of the same funds in my brokerage account. Are you saying I could potentially sell those at a loss in my taxable account to get the tax deduction, then shift my IRA into different investments to try to recover some value before converting? Would that timing create any issues?
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Connor Murphy
That's exactly what I'm suggesting. You can sell the losers in your taxable account to claim the capital loss (which can offset capital gains or up to $3,000 of ordinary income per year). Just be careful of wash sale rules - don't buy back the same or substantially identical investments within 30 days in any account. Regarding timing, there's no issue with changing investments within your IRA before converting. The pro-rata rule only cares about the total value at conversion, not what specific investments you hold. Just be aware that if the market suddenly jumps after you rebalance, you might end up with gains that would be taxable upon conversion, so there's some risk involved.
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Yara Sayegh
One other form to be aware of - if you're converting in 2025, the custodian will issue a 1099-R for the conversion with distribution code G. Make sure that matches what you report on your tax return. Sometimes people get confused because they see the 1099-R and think they need to report it as income, but in your case (with non-deductible contributions and a loss), you'll report the distribution but won't have additional taxable income from it.
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NebulaNova
I converted an IRA last year and my 1099-R had code 7, not G. Is that a problem? I already filed my taxes...
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Oliver Weber
Code 7 means "normal distribution from an IRA (other than a Roth IRA)" while code G is specifically for "direct rollover and rollover contribution." If you did a direct trustee-to-trustee conversion, you should have gotten code G. Code 7 is typically for distributions that aren't rollovers. You might want to contact your custodian to see if they need to issue a corrected 1099-R, especially if this affects how you reported the conversion on your tax return. It could potentially impact your tax liability if not reported correctly.
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