Thanks for pointing this out! So I'll need to file Form 8606 for both tax years then? For 2023 to show the $5,000 nondeductible contribution, and then again for 2024 to show the conversion including the earnings? Will I also get some kind of tax statement from my brokerage showing all of this or do I need to track it myself? I'm worried about messing up the numbers.

Yes, you'll need to file Form 8606 for both years. For 2023, you'll only complete Part I to establish your nondeductible contribution and basis in your Traditional IRA. Then for 2024, you'll complete Parts I and II to report the conversion. Your brokerage will send you 1099-R forms that show the recharacterization and the conversion, but they won't specifically break out your basis vs. earnings in a way that directly maps to Form 8606. That's why keeping good records is important. The 1099-R for the conversion will show the full $5,450 as a distribution, but you'll use Form 8606 to identify that $5,000 of that is your nondeductible basis (not taxable) and only the $450 in earnings is taxable income.

It's because Roth IRAs were originally designed as a retirement vehicle for middle-income people. The tax benefits are pretty significant since all growth is tax-free, so Congress limited them based on income. The backdoor method exists because there's no income limit on Traditional IRA contributions (though there are limits on deductibility), and there's no income limit on conversions from Traditional to Roth. This loophole has been known for years but Congress has never closed it, essentially making it an approved method. It's definitely more paperwork, but for high-income earners, getting money into a Roth is usually worth the extra steps.

Thanks for explaining, that makes sense. It's just frustrating how everything in the tax code seems designed to create extra hurdles. I get limiting the tax advantages, but this seems like it just creates work for no reason since the backdoor option exists anyway.

But doesn't the W2c get reported to the IRS automatically by the employer? Won't their systems flag the mismatch eventually?

Yes, the W2c gets reported by the employer to the IRS, so they will be aware of the discrepancy. Their automated matching system will technically "flag" it, but they have materiality thresholds. For small amounts like $84, they'll typically just adjust your account internally and might send a notice with the small balance due plus minimal interest. It's an automated process that doesn't constitute a full "audit" - just a routine adjustment based on information reporting.

I did the same with a $65 correction and DID get a letter about 8 months later. They adjusted my tax by like $13 and charged $0.82 in interest. Just paid it online and that was that. No big deal.

That's a good point. I just checked and his withholding from the first job was about 8.5% of his gross income. That does seem a bit low now that you mention it. Could that be contributing to the problem as well?

Yes, 8.5% is definitely on the low side for federal withholding. For someone making around $38,000, you'd typically expect to see closer to 10-12% withheld for federal taxes, assuming standard deduction and no special circumstances. This confirms that both employers were under-withholding. The first wasn't withholding quite enough, and then the second one withheld almost nothing because of the single paycheck issue. When combined, this created the unexpected tax bill. For 2025, he should definitely update his W-4 with his current employer to request additional withholding - maybe an extra $20-30 per paycheck to make up for the shortfall.

This is so helpful! My parents have been dealing with the exact same issue and I couldn't figure out why. Dad works at two different places and every year they owe a bit even though both jobs withhold taxes. Now I understand it's because neither employer knows about the other income.

I hadn't even thought about Section 179 for the yard improvements! Would that be instead of including the square footage in my home office calculation, or could I possibly do both? The improvements cost about $4,800 total.

You generally can't double-dip by claiming the same expenses two different ways. The home office deduction would let you deduct a percentage of all household expenses including utilities, insurance, mortgage interest, etc. based on square footage used for business. If you instead use Section 179 for the improvements, you could potentially deduct the full $4,800 immediately rather than depreciating it over time, but you wouldn't include that outdoor space in your home office square footage calculation. It often comes down to which method gives you the better deduction in your specific situation.

The simplified option is definitely easier but it's generally not great for this situation. It's capped at 300 sq ft which is probably less than your combined indoor office and outdoor dog area. Plus, as you mentioned, there's no provision for including outdoor space. I'd stick with the regular Form 8829 if you want to include that yard space.

Thanks for confirming my suspicion. The simplified method seems too limiting for my situation. I'll go with Form 8829 so I can properly document all the space I'm using for business.

Unfortunately, you cannot claim EIC if your filing status is Married Filing Separately. That's one of the basic requirements for the credit. So that strategy wouldn't help in this specific situation with the Earned Income Credit.

You're absolutely right, and I apologize for the misinformation. I was confusing EIC with some other credits that can sometimes be optimized with different filing statuses. The EIC specifically cannot be claimed by anyone using Married Filing Separately status. This is a good reminder for everyone to verify tax advice, even from well-meaning people online. Thanks for the correction!

Which tax software programs do you recommend? I've been using TurboTax but I'm wondering if there are better options for handling these complex situations with unusual income types.