That's a good point. They're planning to retire in about 8-10 years, and I think their retirement income will put them around the 22-24% bracket based on their pension and expected 401k/IRA withdrawals. So it sounds like pre-tax contributions still make sense now, especially in 2023 if they're in the 24% bracket. But doesn't that still leave the question of whether to do the SEP for 2023 vs. prioritizing backdoor Roth going forward? The SEP would block backdoor Roth unless we convert it (paying taxes again).

If their retirement tax bracket is expected to be 22-24%, then yes, pre-tax contributions make sense now, especially while they're still in the 24% bracket. For your specific question about 2023 SEP vs. future backdoor Roth, I'd recommend a hybrid approach. Have your dad make a SEP contribution for 2023, but perhaps not the full $12,889. He could contribute just enough to keep him from spilling into a higher bracket. This gives some tax savings now while limiting the amount that would affect future backdoor Roth conversions. Then for 2024 and beyond, focus on maxing out his employer 401k (including any after-tax contributions for mega backdoor Roth) before considering backdoor Roth IRA strategies. The 401k contributions would give him the pre-tax benefit without the pro-rata complications of the SEP.

This is a really good point about being near the bracket edge. Moving from 24% to 32% is an 8% jump which is huge. If a $12,889 SEP contribution could keep them in the lower bracket for 2024, that would save significantly more than just the direct tax benefit on the contribution itself.

That's actually a fantastic point I hadn't considered! They're definitely near the edge of the bracket - I think my mom estimated they'll be about $15-20k over the 24% threshold for 2024 without any additional deductions. So a $12,889 SEP contribution for 2023 wouldn't directly affect 2024 taxes, but it would free up cash they could use for other deductions or opportunities in 2024. I'll definitely bring this up with them - maybe they could increase 401k contributions enough in 2024 to stay in the 24% bracket if they preserve more cash now with the SEP contribution for 2023. Thanks for this perspective!

Wait, so even income my wife earned in her home country BEFORE getting her green card would count? We'd have to pay US taxes on that too? That seems unfair since she wasn't even a resident then!

Yes, that's exactly right. When you make the 6013(h) election, you're choosing to be treated as US residents for the ENTIRE tax year. This means all worldwide income from January 1st onward is subject to US tax reporting requirements, even income earned before your wife physically became a resident. It can seem unfair, but the trade-off is that you get to file jointly, which often saves significantly on taxes overall. You may also be eligible for the Foreign Tax Credit if she paid taxes on that income in her home country, which can offset any US tax owed on the foreign income.

TurboTax can handle it but not super smoothly. You'll need to manually attach the election statement. I used TurboTax last year for this exact scenario and had to write up the statement separately. The premium version did walk me through the dual-status alien questions though!

That's an interesting approach I hadn't considered! Do you know if there would be any additional tax implications I should be aware of with this method? And would I still be able to claim the standard mileage rate for the personal use of my vehicle on other schedules?

If you go the lease route, you'd be treating the vehicle as rental property on your Schedule E, so you'd need to track and deduct actual expenses rather than using the standard mileage rate. You'd report the lease income from the partnership, then deduct expenses like depreciation, insurance, maintenance, and fuel based on business percentage use. For the portion of your vehicle used personally, you wouldn't be able to claim any deduction since that's considered personal use. The standard mileage rate wouldn't apply once you've chosen to treat the vehicle as rental property. This approach works best for newer, more expensive vehicles where actual expenses exceed what the standard mileage rate would provide.

That approach won't work anymore. Employee business expenses were eliminated as deductions for most people with the Tax Cuts and Jobs Act of 2017. Unless you're in certain specific professions (like armed forces reservists, qualified performing artists, etc.), you can't deduct unreimbursed employee business expenses on your personal return.

What exactly is the pro-rata rule? I've been doing backdoor Roth for 2 years but have an old traditional IRA with about $30k in it. Should I be worried?

Yes, you should definitely be concerned. The pro-rata rule means you can't just convert your non-deductible contributions tax-free if you have other pre-tax IRA money. The IRS looks at all your IRA accounts (traditional, SEP, SIMPLE) as one big pot when you do a conversion. The taxable portion is calculated based on the ratio of pre-tax money to the total IRA balance. So if 80% of your total IRA money is pre-tax, then 80% of any conversion will be taxable regardless of which specific dollars you're converting.

TurboTax actually handles this pretty well but it's not obvious. You need to go to the IRA contributions section and make sure you select "nondeductible contributions." It'll then walk you through Form 8606. Just make sure you indicate which tax year the contribution was for. For the conversion, that goes in a separate section under "IRA distributions.

That's interesting about the stepped-up basis, but unfortunately the house was solely in my name from the beginning. We never did a joint ownership. However, I did install a wheelchair ramp and some bathroom modifications for him last year. I hadn't even thought about claiming those as medical expenses! Is there a specific form I need to use for that?

Since the property was solely in your name, you're right that the stepped-up basis wouldn't apply. However, those modifications for your father's care are definitely potential medical expense deductions. You would claim these on Schedule A as itemized deductions under medical expenses. You'll need to keep receipts for the wheelchair ramp and bathroom modifications as supporting documentation. Remember that total medical expenses are only deductible to the extent they exceed 7.5% of your adjusted gross income. If the modifications were substantial, they could help you reach that threshold, especially combined with other medical expenses you may have incurred.

I used FreeTaxUSA last year for a similar scenario with my aunt's house. It was actually much clearer than TurboTax for entering the capital gains info. They have a specific section for sale of home where you can indicate it wasn't your primary residence, and then it walks you through calculating your basis and gain or loss. So much cheaper than TurboTax too!