Has anyone considered the possibility of a 1031 exchange if the trust wants to sell the house but avoid capital gains? Would an IDGT be eligible for that?

This is a great question that highlights the complexity of IDGT planning. One additional consideration I haven't seen mentioned is the potential for valuation discounts when the property was transferred into the trust in 2022. If your father retained a life estate but transferred the remainder interest, the value of that remainder interest for gift tax purposes would have been discounted based on his life expectancy at the time. However, for income tax basis purposes after his death, the entire property value (not just the remainder interest) should receive a stepped-up basis since the retained life estate causes inclusion under Section 2036. This creates a beneficial mismatch where the gift tax value was discounted but the step-up applies to the full property value. I'd also recommend documenting the property's condition and any improvements made while it's in the trust, as these could affect the basis calculation. If your father makes significant improvements to the property while living there, those improvements should also receive stepped-up basis treatment since they're part of the property included in his estate.

One thing I learned the hard way: keep track of which calendar year everything happens in. The 60-day recontribution rule is super helpful, but if your withdrawal was in December and the recontribution was in January, it can create complications since they cross tax years. In my case, I had to file a special form to carry the recontribution credit forward to the next tax year. Just something to be aware of if you're making withdrawals late in the year.

This is a really detailed and helpful thread! I'm dealing with a similar situation but with a twist - my daughter received both a merit scholarship AND need-based financial aid that came through after I'd already made the 529 withdrawal. From what I'm reading here, it sounds like I have options with both the 60-day recontribution rule and the scholarship exception. But I'm wondering - can you use the scholarship exception for need-based aid too, or does it only apply to merit scholarships? The financial aid office classified her aid as a "need-based grant" rather than a scholarship. Also, if I have documentation showing both types of aid totaling more than what I withdrew, does that give me even more flexibility in how I handle the tax reporting? I want to make sure I'm taking advantage of all available options before I decide whether to recontribute or keep the money out for other education expenses.

Has anyone used the Form 8606 for reporting this kind of partial conversion? My accountant said I need to fill this out to show the taxable portion of my rollover but I'm completely lost on how to complete it properly.

I went through this exact same situation last year and it was definitely confusing at first! Here's what I learned from my tax preparer and some research: The key is understanding that your employer's traditional contributions were never taxed when they went into your 401k, so when you roll them to a Roth IRA, that's essentially a conversion that triggers taxable income. Your personal Roth contributions that show in Box 5 are fine since you already paid taxes on those. What helped me was creating a simple spreadsheet tracking my contribution history. I went back through my pay stubs and 401k statements to identify exactly how much my employer contributed as traditional (pre-tax) money versus my own Roth contributions. This gave me the exact amount I needed to report as taxable conversion income. Most tax software will handle this once you know the amounts - look for the section on "partial rollovers" or "mixed traditional/Roth distributions." You'll enter the total rollover amount, then specify how much was already taxed (your Roth portion) versus how much needs to be taxed now (employer traditional portion). Don't skip this step - the IRS will eventually catch discrepancies between what your 1099-R shows and what you report, and it's much easier to get it right the first time than deal with notices later!

I think there's confusion happening with your forms. Form 8958 is for community property allocation (splitting income 50/50), while Form 8959 is for Additional Medicare Tax (which only applies if your income is over $200k single or $125k MFS). The reason you're seeing one person owe and one get a refund is probably because of tax credits and stimulus payments going to just one spouse. That's normal even in community property states. Income splitting doesn't mean credit splitting. Does your tax preparer have an EA (Enrolled Agent) or CPA designation? Those credentials mean they've passed rigorous testing and maintain continuing education requirements. A "Tax Return Preparer" might just have minimal training.

I went through a very similar situation last year in Texas (also community property state, MFS filing). The key thing to understand is that Form 8958 is absolutely required for your situation - it allocates community income 50/50 between spouses regardless of who actually earned it. The dramatic difference in your tax outcomes (husband owing $3,200 vs your $4,700 refund) is likely correct because while income gets split 50/50, credits and payments don't. Since you claimed your child, you get the full Child Tax Credit on your return only. Same with the stimulus payments - they go entirely to whoever claims the qualifying dependent. Your extra $25 per paycheck withholding throughout 2023 also only benefits your return, not your husband's. So even though your income was properly split via Form 8958, all the credits and extra withholding are concentrated on your return. The red flag for me is that your preparer initially forgot Form 8958 entirely. This form is mandatory for MFS in community property states - there's no option to skip it. I'd definitely verify their credentials on the IRS directory. For complex situations like yours, you really want a CPA or Enrolled Agent with specific community property experience, not just someone with a basic PTIN. You might want to double-check that Form 8958 properly splits your W-2 income 50/50 between both returns, regardless of who earned what.

Make sure the interest rate isn't too low or the IRS might consider it a gift! There's something called the Applicable Federal Rate (AFR) which is the minimum interest rate that should be charged for family loans. It changes monthly. If the rate is below AFR, the IRS might recharacterize part of the loan as a gift and then your uncle could have gift tax issues.

Just want to add one more consideration that's often overlooked - make sure you and your uncle both understand the payment tracking requirements! Since this will be treated as a legitimate mortgage for tax purposes, you'll need to keep detailed records of all payments made throughout the year. Your uncle should probably issue you a Form 1098 (Mortgage Interest Statement) by January 31st each year showing how much interest you paid, just like a bank would. If he doesn't issue one, you can still deduct the interest, but you'll need to provide his name, address, and SSN on your tax return when you claim the deduction. Also worth noting - if you ever refinance or pay off the family loan early, make sure to handle any prepayment penalties or forgiven debt properly for tax purposes. The IRS scrutinizes family loans more closely than bank loans, so having everything properly documented from day one will save you headaches later!