Thanks for bringing this up! I am actually above the income limit for deductible contributions, so I'll definitely need to file Form 8606. Do I still report the recharacterized amount ($5,300) on that form, or do I need to use the original $6,000?

You would report the recharacterized amount ($5,300) on Form 8606 since that's what actually went into your Traditional IRA. This becomes your basis in the Traditional IRA for future distributions or conversions. Form 8606 is really important in your situation because it establishes that you've already paid tax on this money. Without it, you could end up being taxed twice on the same funds when you eventually withdraw them.

I agree. The fact that the 5498 only shows the recharacterized amount ($5,300) is exactly right. The IRS treats this as if you had contributed $5,300 to the Traditional IRA from the beginning. The $700 loss is just part of the investment experience, not an excess contribution that needs to be withdrawn.

Thank you so much for this - especially the naming convention! That's exactly what we've been confused about. The custodian kept talking about "reregistering" the account and we weren't sure if that was the right thing. Is there a specific form we should ask for to make this transfer happen correctly?

You'll want to ask the custodian for their "Inherited IRA Successor Beneficiary" form or sometimes it's called a "Death of Beneficiary" form. Each institution has slightly different paperwork, but those terms should help them find the right forms. Your mother-in-law will need to provide a copy of your father-in-law's death certificate and possibly his original inherited IRA paperwork. Be very specific that this is a successor beneficiary situation for an already-inherited IRA, not a new inheritance. If the person you're speaking with seems confused, ask to talk with their inherited IRA specialist - most larger institutions have people who specifically handle these more complex scenarios.

This is such an important point. My family got caught in this exact situation - my uncle passed in 2018 (pre-SECURE Act), then his beneficiary (my cousin) passed in 2022. The financial institution tried to apply the post-SECURE Act 10-year rule to the successor beneficiary, which was incorrect. The original inheritance date is what matters.

Do you need to keep special documentation beyond the invoices from the production company? My accountant mentioned something about needing to document the "business purpose" but wasn't clear what that meant exactly.

Beyond the invoices, I'd recommend keeping a simple log that documents the business purpose of each video. Nothing complicated - just a spreadsheet with video titles, publication dates, and a brief note about how each relates to your business (like "demonstrates expertise in X service" or "explains process relevant to potential clients"). This extra documentation isn't strictly required, but it's extremely helpful if you ever get audited. I learned this the hard way when I had to justify some marketing expenses during a review. Having a clear business purpose documented for each expense makes the process much smoother.

Which category in TurboTax did you use for this? I'm trying to enter similar expenses and getting confused about where they belong.

2 Could it be related to the new preparer requirements that went into effect this year? I heard something about tax professionals needing more documentation, but not sure of the details.

11 Yes, there are enhanced due diligence requirements for preparers, especially for returns claiming certain credits. But these are typically addressed during tax preparation, not months later. And the requirements focus on verifying eligibility for specific tax benefits - not necessarily collecting copies of everyone's IDs after the fact. More concerning is the vague explanation of "fiscal year closing" which isn't a standard term associated with preparer documentation requirements. A legitimate request would cite specific IRS regulations or PTIN requirements that necessitate the documentation.

7 How did you end up handling it? Did you provide the documents they asked for? I'm really confused about what to do here.

Most of what I sold were collectibles I'd been buying and flipping, so definitely not personal items sold at a loss. I was buying things specifically to resell at a higher price, so based on what you're saying, it sounds like I would owe taxes on this income. I'm guessing this would count as a business activity?

Yes, that definitely counts as business activity since you were buying with the intention to resell at a profit. That would be subject to both income tax and self-employment tax (15.3% on top of regular income tax). But the good news is you can deduct all your legitimate business expenses - the cost of the items you purchased to resell, any shipping supplies, eBay and PayPal fees, mileage driven to purchase inventory or ship items, a portion of your internet if you're listing from home, etc. These deductions can substantially reduce the taxable profit.

That's only for goods and services payments though right? If you use friends and family that doesn't get reported.

Correct, it's only for goods and services payments. But using Friends and Family for business transactions is against PayPal's terms of service and can get your account limited or banned. Plus, as a buyer, you lose purchase protection when using Friends and Family. More importantly, deliberately using Friends and Family to avoid tax reporting could be considered tax evasion if the IRS can prove intent. Many platforms are getting better at detecting when people are trying to circumvent the system, so it's a risky strategy that can lead to bigger problems down the road.