I had LITERALLY the exact same situation happen to me last year. Contributed to Traditional IRA on Dec 29, initiated conversion same day, but it didn't settle in my Roth until January 3. I was freaking out too! My tax guy confirmed what everybody here is saying - report the nondeductible contribution on 2024 Form 8606, then report the conversion on 2025 Form 8606. When you get the 1099-R in January 2026 (for the 2025 tax year), it'll show the distribution from your Traditional IRA. The most important thing is making sure you file Form 8606 for 2024 to establish that the money was after-tax (non-deductible) contributions. That way when you convert in 2025, you're not taxed on it again.

I went through this exact same scenario two years ago and can confirm what everyone is saying - you didn't mess up at all! The key insight is that the backdoor Roth strategy doesn't require the contribution and conversion to happen in the same calendar year. What's important is that you made a non-deductible Traditional IRA contribution for 2024 (which you did on 12/28/2024), and you'll properly report that on your 2024 Form 8606. The conversion happening in January 2025 is actually pretty common with year-end contributions due to settlement delays. One tip I wish someone had told me: keep really good records of both transactions with the exact dates and amounts. When you file your 2025 taxes next year, having clear documentation of the contribution basis from 2024 makes everything much smoother. The IRS sees these cross-year backdoor Roth conversions all the time, so as long as your paperwork is in order, you're golden. Also, don't stress about not having the 1099-R yet - that will come in January 2026 for your 2025 tax filing, which is exactly when you need it!

One thing I haven't seen mentioned yet is the importance of getting a CPA or tax professional involved, especially with a settlement this large. Even though most of the $135k is likely non-taxable, having professional guidance can save your brother-in-law from costly mistakes. A good tax pro can help him understand exactly how to report this (or confirm he doesn't need to report it), plan for any investment income from the settlement money, and make sure he's maximizing any possible deductions related to his injury. With that much money involved, the cost of professional advice is usually worth it for peace of mind and proper compliance. Also, he should consider spreading out any taxable portions over multiple years if possible through the settlement structure - this can help avoid jumping into a higher tax bracket all at once.

I work in benefits administration and deal with worker's comp settlements regularly. Your brother-in-law is right to be cautious, but he can relax a bit! The good news is that Florida has no state income tax, so he only needs to worry about federal implications. For federal taxes, the key is understanding what each portion of the settlement covers. Pure compensation for physical injuries from a work-related accident is NOT taxable. However, if any portion specifically replaces lost wages or punitive damages, those parts would be taxable. With a $135k settlement, I'd strongly recommend he: 1. Get a clear breakdown from his attorney showing what each dollar is designated for 2. Ask for a letter from the insurance company confirming the tax status of different portions 3. Consider consulting a tax professional before depositing - it's worth the cost for this amount Even if some portion is taxable, he won't get "in trouble" with the IRS as long as he reports it correctly. The IRS expects these settlements and has clear guidelines for them. The important thing is proper documentation and reporting.

Just be careful with the timing! The 2-out-of-5 years test is extremely strict. If you're off by even a few days, you could lose the entire $500k exclusion. I'd recommend selling a month BEFORE your deadline to be safe. Also, keep AMAZING records of when you moved out and when the property became a rental. Save utility bills, moving receipts, rental agreements, etc. The IRS loves to challenge primary residence claims.

Great question! I went through something very similar last year. You absolutely CAN do both - take depreciation deductions during your rental period AND still qualify for the $500K capital gains exclusion when you sell. Here's the key: Section 121 of the tax code (the primary residence exclusion) and Section 167 (depreciation) are completely separate provisions. As long as you meet the 2-out-of-5 year residency test (which you will, having lived there May 2023-May 2025), you keep your exclusion eligibility. The only "gotcha" is Section 1250 depreciation recapture - you'll owe tax at up to 25% on whatever depreciation you claimed during those rental years. But this is separate from and doesn't reduce your $500K exclusion. Pro tip: Keep meticulous records of your move-out date and when the property becomes a rental. Also document everything about your sale timing to ensure you stay within that 5-year window. The IRS is very strict about these dates! Your accountant should be familiar with this, but if you need the specific citations: Section 121(a) for the exclusion, Section 167 for depreciation, and Section 1250(a)(1) for recapture. Good luck!

23 Has anyone tried just putting like $1 of income instead of $0? My accountant friend suggested this makes it less likely to trigger a flag in the system while still giving you essentially the same loss deduction.

I just went through this exact situation last year with my Etsy shop! Started in late 2023 with about $3,800 in startup costs but no sales until 2024. The key thing I learned is that you absolutely CAN claim these expenses even with zero income. In TurboTax, go to the Business section and select "I'll enter my business info myself" when it asks about 1099s. Then just enter $0 for income but add all your legitimate business expenses - tools, materials, website costs, home office, etc. One important tip: make sure you can justify that this is a real business and not a hobby. Keep records of your business activities, any marketing you did, your business plan (even informal), and evidence you intended to make a profit. The IRS gets suspicious of businesses that show losses year after year with no income. Your Schedule C loss will flow through to your main tax return and reduce your W-2 income, which could give you a nice refund! Just be prepared to explain your business activities if questioned.

Don't forget that you're only allowed ONE rollover per 12-month period for an HSA! This is a critical point that hasn't been mentioned yet. If you've already done a rollover in the past 12 months, you'll need to use this money for qualified medical expenses to avoid penalties. Also, the 60-day rollover window is strict - no extensions. Calendar those 60 days from when you received the check! Even one day late and you'll face taxes and potentially penalties.

I dealt with a similar situation when I left my job last year! One thing I wish I had known earlier is that you can actually contact Health Equity and request a direct trustee-to-trustee transfer instead of receiving a check. This avoids the 60-day rollover window entirely and doesn't count toward your one-rollover-per-year limit. If you've already received the check, you're still in good shape - just make sure to deposit it into a new HSA within 60 days. I ended up opening an HSA with Fidelity (no fees) and was able to deposit the check there without any issues. The key is making sure your new health plan is HSA-eligible before opening the account. Also, keep detailed records of the rollover process! I saved the original check stub, took photos of the deposit, and kept all correspondence. The IRS doesn't typically ask for this documentation, but it's good to have just in case. Good luck with your decision!