The married filing separately thing is interesting! I've rarely seen cases where it's beneficial. But what about separated couples who aren't legally divorced yet? Would you have some exception for them?

Good point about separated couples! I'd create a simple "legally separated" status that would essentially treat them as single filers. The current system with MFS is just too punitive with all its limitations and phase-outs. The problem is that MFS was designed to prevent gaming the system, but it's become so restrictive that it actually creates unfair outcomes for people in difficult situations, like those separating or dealing with a spouse who won't cooperate on taxes. A better-designed single status for separated individuals would be much more straightforward.

Average cost basis would be amazing! Also why are crypto transactions so complicated tax-wise? I bought and sold some Bitcoin last year and the tax calculations were insane. Each transaction created a taxable event and I had hundreds.

Does First Time Penalty Abatement work if you have multiple years unfiled? I thought it was only for a single mistake, not years of non-compliance.

First Time Penalty Abatement only applies to one tax year, but even with multiple years unfiled, they can still qualify if they didn't have any penalties in the three years before the earliest unfiled year. So if 2021 is their earliest unfiled year, they'd need a clean compliance history for 2018-2020. You're right that it's designed for isolated mistakes rather than patterns of non-compliance, but the IRS often still grants it for the first year in a multi-year situation. The remaining years wouldn't qualify for first-time abatement, but might qualify under other reasonable cause arguments depending on the circumstances.

That 30% recommendation is really smart. I used to only save 15% and kept getting surprised by how much I actually owed. Switching to 30% has made a huge difference. I even set up automatic transfers to my "tax" account whenever money hits my checking account.

Thank you for mentioning this! With the baby coming next month, I completely forgot to factor in how that would affect our taxes next year. Would you recommend we split the $2,000 child tax credit between both our W-4 forms or put the full amount on just one of our forms? Also, do you know if we qualify for the child care tax credit as well as the dependent care FSA? Or can we only use one of those options?

You can put the full $2,000 on just one W-4 form, or split it between both - the end result will be the same. Just make sure you don't claim it on both forms (which would incorrectly double-count the credit). Regarding the child care tax credit vs. dependent care FSA: You can potentially use both, but there's an important limitation. The expenses you pay through the FSA cannot also be used for the child care credit - no "double dipping." Usually, with your income level, the FSA is more beneficial because it reduces your taxable income directly. The child care credit percentage is reduced at higher income levels, making the FSA more valuable for most dual-income professional couples.

This is spot on. My wife and I have almost identical incomes to the OP, and increasing our 401k contributions made a huge difference. We each increased from 10% to 15% contributions and it dropped our tax bill by almost $3,000. Plus that money is growing tax-deferred instead of going to the IRS. Also worth noting that at their income level, they might be close to the phase-out range for some tax benefits once the baby arrives, so tax planning becomes even more important.

Wait, does claiming the kid automatically make you Head of Household? I thought you had to have the child living with you for more than half the year for that? How does that work with 50/50 custody?

You're absolutely right to question that - I oversimplified. For Head of Household status, you need to have the child in your home for more than half the year AND provide more than half of the household's financial support. In true 50/50 situations, only one parent will qualify, and it's not automatically tied to who claims the Child Tax Credit. This is actually why it's so important to understand all the different tax benefits - they don't all follow the same rules. For example, the parent who has the child more nights during the year (even by just one night) might qualify for Head of Household, while the other parent might still be able to claim the Child Tax Credit with a signed Form 8332.

My ex and I do exactly this with our kids. You can actually fill out Form 8332 to cover multiple future years. We did one form for a 10-year period specifying which years each of us would claim the kids. Just be super clear about which tax years you're releasing the claims for. Also make a copy for yourself - my ex lost his copy one year and it was a whole thing.

Should she get a formal custody agreement ASAP? Seems like that would help with the tax situation too.

Absolutely. A formal custody agreement would definitely help clarify the situation, both for tax purposes and beyond. It creates an official record of the parenting time split, which is crucial for determining tax benefits. Even with a formal agreement though, remember that the IRS ultimately follows its own rules about who qualifies as the custodial parent for tax purposes. If the agreement specifies that the father can claim the child despite having less than 50% physical custody, the mother would still need to complete Form 8332 to release her claim. Without that form, the IRS will side with whoever meets the physical residence test.

This is a really good point! My brother went through something similar. The mom wouldn't put him on the birth certificate, and he had to legally establish paternity before he could even file for any custody rights or visitation. The tax stuff was completely off the table until that was resolved.