Do you know if he would get the 1099-S directly or would it only go to his ex since she's the one who actually handled the sale and got the proceeds?

If his name was on the deed at the time of sale, the closing company should have sent the 1099-S to both parties. They're required to report to everyone listed on the property records. Each person would receive a 1099-S showing the full sale amount (not divided). This is exactly why your brother needs to properly document on his Schedule D that he previously sold his interest and received compensation. Otherwise, the IRS computers will think he received half the proceeds from the 2024 sale.

Yes, this is an important consideration! If he met the ownership and use tests (owned and lived in the home as his main residence for at least 2 out of the 5 years before the interest was disposed of), he could potentially exclude up to $250,000 of gain. In this case, it sounds like he might have taken a loss rather than a gain, but the timeline matters. The 5-year lookback period would start from when he effectively "sold" his interest (the buyout), not the final sale date of the house. So if he lived there for at least 2 years before accepting the buyout payment, he would qualify for the exclusion if there had been a gain.

Thanks for bringing this up! The trust document says something about discretionary distributions being allowed, so I guess that makes it a Complex Trust? If that's the case, does the trust itself pay taxes on the gains from the house sale even if I immediately distribute all the money to myself as the beneficiary?

Yes, if the trust allows for discretionary distributions, it's classified as a Complex Trust for tax purposes. If you distribute all the proceeds from the house sale to yourself in the same tax year, the trust can generally take a distribution deduction on its Form 1041. This effectively shifts the tax burden from the trust to you as the beneficiary. You'll receive a Schedule K-1 from the trust showing your share of income, and you'll report this on your personal tax return. This is often advantageous because trusts reach the highest tax bracket much faster than individuals. For 2023, trusts hit the top tax rate of 37% at just $14,450 of income, whereas an individual doesn't reach that rate until over $578,000 (for single filers).

Excellent point about state returns. I learned this the hard way when I got a penalty notice from our state tax authority. They had a $400 income threshold for trust filings while the federal was $600.

Do you know how I can specifically request this first-time penalty abatement? Would I need to call the IRS directly or is there a form? We've never had issues before these last two years so maybe we qualify.

You can request first-time abatement by calling the IRS directly - there's no specific form for it. When you call, specifically ask for "first-time penalty abatement" under the IRS First Time Abatement policy. Be prepared to verify that you haven't had penalties in the prior 3 tax years. Alternatively, you can write a penalty abatement letter after you receive a bill with penalties. Include your name, address, SSN, and a statement requesting first-time abatement. Make it clear you've had a clean compliance history and are taking steps to avoid future issues (like updating your W4s, which you've already done).

This could be dangerous advice depending on the person's credit situation. IRS interest rates (currently around 7-8%) are often lower than credit card rates after promotional periods (often 18-25%). If they can't pay off the card in time, they'd be in worse shape.

We don't have any student loans yet - been trying to pay as we go, which is why losing that education credit hit so hard. But that's good to know about the deduction having higher income limits if we do need loans next year. I didn't realize required course materials could count! So like textbooks and stuff? My school gives itemized receipts for everything, so I should be able to count those too?

Yes, required textbooks and course materials can count as qualified education expenses! The key word is "required" - they need to be necessary for enrollment or attendance at your educational institution. Your school's itemized receipts will be perfect for documenting these expenses. Just make sure you only include materials that were genuinely required for your courses. Optional study guides or supplemental materials typically don't qualify.

DON'T do MFS! You completely lose eligibility for education credits when filing separately. Plus you lose a bunch of other benefits too (student loan interest deduction, higher standard deduction rates, etc). Usually MFS ends up costing more in lost credits than you'd save.

This is a really good point. I once made a single extra principal payment of $10k and was shocked at how much it reduced my yearly interest. Also, if your mortgage has an escrow account for taxes and insurance, changes to those amounts wouldn't affect the interest portion but could make your total payment seem consistent even while the interest/principal ratio was changing.

We actually did make a couple of extra payments last year - put our tax refund toward the mortgage and then got a small bonus in October that we threw at it too. Never connected that this would significantly change the interest calculation. Between the loan sales and the extra payments, I'm starting to think this drop might be legitimate after all. Going to double-check all our statements though just to be safe.

This happened to me too! The new servicer somehow "lost" my payment allocation instructions and reverted to their default distribution. I only caught it because I was tracking everything in a spreadsheet. Definitely go through each statement carefully.

Is there an easy way to verify this? I have all my statements but honestly have no idea what I'm looking for in terms of payment allocation. What specific numbers should I be comparing month to month?