That's a really good point about business expenses! My partner definitely had work-related costs during those years, like tools and supplies. Do you know if they can still claim those deductions when filing so late? And did your sister's husband end up having to file for all the missing years?

Yes, they can still claim legitimate business deductions when filing late returns. The key is having some form of documentation or reasonable estimates that could be justified if questioned. Even if they don't have perfect records, they should make reasonable estimates of business expenses rather than filing as if they had none. My sister's husband ended up filing 7 years back (which was what the IRS requested when they contacted him). The IRS was primarily concerned with the most recent years and years where he had significant income. They worked out a payment plan and the whole process was less catastrophic than they initially feared.

This is true but a bit alarmist. Yes, improperly claiming exempt is an issue, but the IRS distinguishes between tax avoidance (legal but aggressive) and tax evasion (illegal). Most cases like this end up as civil matters with penalties and interest, not criminal tax evasion charges.

Thanks for the info! We haven't been taking depreciation deductions for that rental period, but I didn't realize we might still need to deal with "allowed or allowable" depreciation. The room was about 15% of the total square footage. Do you know if we need to do separate calculations for each ownership period (her alone vs. after marriage), or can we just do one calculation for the whole ownership period?

You'll need to handle the depreciation recapture for the portion that was rented (15% in your case) regardless of whether you took the deductions or not. The IRS considers depreciation to be "allowed or allowable" even if you didn't claim it. For your second question, you'll do one continuous calculation covering the entire ownership period. The fact that you got married during ownership doesn't create separate calculation periods. What matters is the total qualified use as a primary residence. You'll track the entire ownership timeline, identify the rental period for that 15% portion, and then calculate accordingly. The marriage itself doesn't reset or change the calculation method - it just potentially increases your exclusion amount from $250K to $500K if you both meet the use test.

Thanks! I'll give H&R Block a try. I've got all our documentation organized, including the substantial kitchen renovation we did that should increase our basis. Anything specific I should watch for when entering the info about the pre-marriage ownership period?

When entering the pre-marriage ownership period, make sure you correctly identify who owned the property during each timeframe. H&R Block will specifically ask about the ownership history. Be careful to enter the original purchase date and amount accurately for the spouse who owned it first. For your kitchen renovation, definitely include that as it increases your basis and reduces your capital gain. The software will prompt you to enter major improvements separately from the purchase price. Also, don't forget to include selling costs (like realtor commissions and closing costs) as they also reduce your taxable gain. The software does a good job walking you through all of this, just be methodical about following each step.

I fortunately don't have any other traditional IRA assets - I've always used my 401k for pre-tax retirement savings and only opened the traditional IRA temporarily for the backdoor process. So I think I'm ok on the pro-rata rule, but that's definitely an important point for others to consider. Actually, I'm wondering if there's any advantage to purposely waiting until the market goes up before doing the conversion next time? That way I could potentially use up some of this basis carryforward?

Intentionally waiting for the market to go up before converting could help use up your basis carryforward, but it comes with risks. The longer you wait to convert, the more potential tax liability you could create if investments grow substantially before conversion. Remember that any growth that occurs while the money sits in the traditional IRA will be taxable when you convert. So while waiting might help with the basis issue, it could create a different tax problem. Most financial advisors recommend doing the conversion quickly after contribution to minimize taxable growth. It's usually a better strategy to just continue with regular backdoor contributions and let the basis work itself out over time rather than trying to time the market for tax purposes.

The basis carryforward calculation happens on Form 8606. If you contribute $6,000 (non-deductible) to a traditional IRA but the value drops to $5,500 before you convert to Roth, you'll have: - Line 5: $6,000 (your non-deductible contribution) - Line 8: $5,500 (the amount you actually converted) - Line 9: $0 (assuming no previous basis) - Line 10: $6,000 (from line 5) - Line 11: 1.000 (divide line 10 by line 8, but capped at 1.000) - Line 13: $5,500 (line 8 × line 11) - Line 14: $500 (line 10 minus line 13) That $500 on line 14 is your basis carryforward to next year's Form 8606.

That's such a good point about the brokerage account! We hadn't even considered that her local bank might not be able to receive the stocks. Did you have to set up the international account from the US side or did your daughter have to do it locally?

We had to coordinate from both sides. My daughter had to open a specific type of account with a brokerage in Australia that had international capabilities. Then on our end, we had to complete special transfer forms with our US brokerage that included her foreign account details and some extra documentation verifying her identity. It wasn't particularly difficult, but it did take about 3 weeks to get everything set up properly. Her brokerage also required documentation showing the origin of the assets (basically proving they were a gift and not some kind of suspicious transfer). Just make sure to start the process well before you want to actually transfer the stocks.

Good point! Bermuda actually has no income tax, capital gains tax, or gift tax. It's basically a tax haven which makes it pretty ideal for receiving assets. She might still need to report foreign accounts depending on local regulations, but tax-wise she's in a pretty advantageous position.

Are there any free alternatives to MileIQ? I'm trying to keep expenses down while starting my business.

Stride is a good free alternative that many of my clients use. It doesn't have all the premium features of MileIQ, but it covers the basics the IRS requires. Some people just use Google Maps to calculate distances and keep a simple spreadsheet with dates and purposes. That works too as long as you're consistent and record everything promptly.

Wait what?? I've been filing self-employed for 3 years and never heard of this. Is this something new?

My accountant mentioned this last year. It's not new, been around since 2018 but many self-employed people miss it. Definitely worth looking into if you're filing a 1099.