If there were literally no earnings between the contribution and conversion (like if the market was down those few days), would the taxable amount be zero? And does the 1099-R differentiate this or do you have to calculate it yourself?

If there were no earnings (or even if there was a loss), the taxable amount would indeed be zero. The 1099-R unfortunately doesn't differentiate this for you - it typically shows the full distribution amount in Box 1 and often shows the full amount as taxable in Box 2a as well, even when it's not. You have to calculate the non-taxable portion yourself using Form 8606. This is why it's so important to file this form - it's your documentation that establishes which portion of the conversion was after-tax money that shouldn't be taxed again.

Thanks for the sequence tips! I think that's exactly what I did wrong - I just entered the 1099-R directly without establishing the non-deductible contribution first. I'm using TaxAct, not TurboTax, but I bet the principle is the same. I'll try re-doing it in that order and see if it fixes the calculation. Appreciate everyone's help on this!

Did you do the return yourself or use a software/service? I'm wondering if it's worth paying for TurboTax or something similar for such a simple return, or if I should just do it manually to show her the forms.

We used the free version of one of the major tax software programs. It was simple enough that we didn't need to pay for anything. I thought about doing it manually to show her all the forms, but the software actually made it easier to explain each step as we went through it. We printed out copies of all the completed forms at the end so she could see what the actual tax documents look like. Best of both worlds - easy guided process but still educational about the forms themselves.

This is such an important point! The same thing happened with my niece. She had about $40 withheld from some bond interest, and the only way to get that back was to file. The threshold for required filing doesn't change the fact that she was entitled to get her withholding back.

Thanks for the practical advice! With the QBI deduction, are there income phaseouts I should be aware of? My wife and I have a combined W-2 income around $220k before any side hustle income.

Yes, there are phaseouts for the QBI deduction. For 2025, the phaseout begins at $364,200 for married filing jointly and completely phases out at $464,200. Since your combined income is $220k, you're safely below the threshold even with additional side hustle income. However, once your total taxable income approaches that phaseout range, you may want to increase retirement contributions or look into other strategies to keep below the threshold. Also, certain service businesses (like consulting) have stricter income limitations for QBI, so the type of side hustle matters. If your business isn't in a "specified service trade or business" category, you'll have more flexibility with the QBI deduction even at higher income levels.

This DAF strategy sounds interesting! How much would someone typically need to contribute to make the "bunching" approach worthwhile? And are there minimum contribution requirements to open a DAF?

We do have access to a Dependent Care FSA through my employer, but I thought we couldn't use both that and the Child and Dependent Care Credit? Are you saying we can use both, just not for the same expenses?

That's exactly right. You can use both a Dependent Care FSA and claim the Child and Dependent Care Credit, but not for the same expenses. Here's how it typically works: If you put $5,000 in your Dependent Care FSA and spend $52,000 on qualifying childcare, you can claim the Credit on up to $3,000 (for one child) or $6,000 (for multiple children) of the REMAINING $47,000 in expenses. You'd exclude the FSA-covered amount from your Credit calculation. While this won't cover all your expenses, the combination of tax-free FSA money and the partial Credit on remaining expenses provides better tax benefits than either option alone. Just make sure to document everything clearly on your tax forms to show you're not double-dipping.

Do you have any recommendations for time-tracking software that works well for this specific situation? We need to track when our nanny is doing business-support activities vs pure childcare.

I hadn't thought about that approach! Do you know what kind of documentation I should include to explain my situation? And did your accountant face any pushback from the IRS on this?

For documentation, I included a signed statement explaining my travel circumstances, copies of my travel itinerary showing the brief nature of my absence, and evidence of my continued ties to the US (apartment lease, utility bills in my name that continued during my absence). My accountant said that for brief absences, especially around holidays or year boundaries, the IRS tends to be reasonable as long as you clearly document that your absence was temporary and that you maintained your US ties. He said he's filed returns this way for years for clients with international travel and never had an issue. The key is being transparent and providing clear documentation rather than trying to hide anything.

Most consumer tax software struggles with dual-status returns. I tried using TurboTax for mine last year and ended up having to abandon it and go to a CPA. The software just isn't designed to handle the complex forms and calculations needed for dual-status returns.

I had the same issue and found SprinTax was actually designed specifically for international/dual-status situations. It costs more than regular TurboTax but was worth it because it handled all the weird form combinations needed for dual-status returns. Still complex but at least it was possible to complete.