Does the 5-year rule apply differently to contributions vs. the first-time homebuyer exception? I thought the 5-year rule only affected whether earnings were tax-free for qualified distributions after 59.5, not for the special exceptions?

You're asking about a somewhat confusing aspect of Roth IRAs. There are actually two different 5-year rules. The first applies to earnings in general - for earnings to be completely tax-free, your first Roth contribution must have been made at least 5 years before withdrawal, AND you must be 59½ or meet another exception. For the first-time homebuyer exception specifically, if your Roth has been open for 5+ years, then up to $10,000 of earnings used for a first-time home purchase can be both penalty-free AND tax-free. If your Roth hasn't been open 5+ years, the $10,000 of earnings is still penalty-free but would be subject to income tax.

What counts as valid proof? I have my tax returns but they don't show the specific Roth contributions since they're not deductible. Would bank statements showing transfers to the brokerage work?

Thanks! I hadn't even thought about deducting expenses. I definitely buy my own cleaning supplies and drive about 15 miles round trip to her house each time. How do I calculate the phone deduction though? I do text with her about scheduling.

For mileage, keep a log of each trip with the date and miles driven. The deduction for 2023 was 65.5 cents per mile, which adds up quickly. So your 15-mile round trip would be worth about $9.83 in deductions each time. For the phone, you need to figure out what percentage you use it for business. If about 20% of your phone use is for coordinating cleaning jobs, you can deduct 20% of your phone bill. Just be reasonable with the estimate and keep your bills as documentation.

This is exactly what I was thinking! The aunt is definitely trying to write off personal home cleaning as a business expense. I had a client try to do this with me for babysitting her kids at her home office.

My wife does have access to a Dependent Care FSA through her company, but we weren't sure if it made sense to use it since I'm self-employed. Would this be better than the Child and Dependent Care Credit you think? We're probably in the 24% bracket if that matters.

At the 24% tax bracket, the Dependent Care FSA would likely be more beneficial. With the FSA, you'd save 24% federal income tax plus 7.65% FICA on up to $5,000, potentially saving around $1,583. The Child and Dependent Care Credit at your income level would probably be at the 20% rate, giving you a maximum credit of $1,200 for two or more children (20% of $6,000). The FSA is generally the better choice for higher-income families, plus it reduces your FICA taxes which the credit doesn't do. Your wife's employment status is what matters for the FSA eligibility, so you being self-employed doesn't affect your ability to use her employer's FSA. Just make sure to coordinate this with your tax planning since you can't use the same expenses for both benefits.

I've been using TaxSlayer Self-Employed for my home consulting business and it's been surprisingly good for the price. Much better questionnaire for finding business deductions than the big names, especially for home office stuff.

Do you know if Texas requires a separate form? I've got an LLC there but can't figure out if I need to do anything special for the state since they don't have personal income tax, but do have that franchise tax thing.

Texas is a bit different since they don't have personal income tax. For a single member LLC in Texas, you're right about the franchise tax. If your LLC's revenue is over the threshold (currently $1,230,000), you need to file a franchise tax report by the due date or request an extension. For the extension in Texas, you'd file Form 05-164 and make any required payment. Even if you're below the no-tax-due threshold, you may still need to file a "No Tax Due Report" by the deadline or request an extension. The Texas Comptroller's website has detailed information specific to your situation.

I tried TurboSelf last year for my LLC extension and it was okay but not great. It handled the basic Form 4868 fine, but wasn't very helpful with calculating a good estimated payment amount. I ended up overpaying by almost $2,000 because it used a very conservative calculation method. Their support was also really slow to respond when I had questions about how to properly categorize some business expenses that would affect my payment amount. I think there are better options out there specifically for small business owners.

I didn't even think about state taxes! Do you know if most states follow the federal rules for the $250k exclusion or do they have their own systems?

Most states do follow the federal capital gains exclusion rules, but there are definitely exceptions. For example, Massachusetts has its own rules that sometimes differ from federal treatment. It's also worth checking if your state has any special forms for reporting real estate transactions. My state required an additional form that wasn't part of the federal return. Your state's tax department website should have information specific to your location.

Yes, if you claimed a home office deduction, it can affect your capital gains exclusion. When you take a home office deduction, that portion of your home is considered business use, not personal use. If you claimed a home office deduction for part of your home, you may have to pay taxes on the gain allocated to that portion of your home, even if the gain on the residential portion is excluded. It's proportional - so if 10% of your home was used as an office, 10% of the gain might be taxable regardless of the exclusion.

Thanks for explaining that. I only used about 8% of the house as my office, so it sounds like a small portion might be taxable. I'll make sure to track that separately when I file.