Make sure when you're doing the 8606 that you're consistent with your records from previous years! This tripped me up last year. If you've done backdoor Roth conversions before, line 2 of Form 8606 should include any "basis" carried over from previous years. If this is your first one, then line 2 would be $0 and line 3 would match line 1 ($7,000). Also, when you enter the 1099-R information in your tax software, some programs will try to tax the entire amount unless you specifically indicate it was a Roth conversion and direct it to Form 8606.

Just went through this exact same situation last month! One thing that really helped me was keeping detailed records of the timeline. I created a simple spreadsheet with: - Date of Traditional IRA contribution: $7,000 - Date of conversion: $7,002.35 - Interest earned: $2.35 This made filling out Form 8606 much clearer. The key insight that finally clicked for me was that the $7,000 represents your "basis" (what you put in with after-tax dollars), while the $2.35 is considered earnings that you've never paid tax on, which is why it becomes taxable income. For future years, definitely consider doing the conversion immediately after contribution like others mentioned. I set up my 2025 backdoor Roth to convert the same day to avoid this complexity entirely. Most brokerages make this really easy to automate. Also, keep good records because if you do backdoor Roths in future years, you'll need to reference this year's Form 8606 for the carryover amounts. The IRS doesn't track your basis for you - that's on you to maintain accurately!

This is such a helpful thread! I'm dealing with a similar situation as a new grad student. One thing I'd add is that your roommate should also check if her university has a tax office or financial aid office that can help clarify how her specific stipend should be classified. My school's financial aid office was actually really helpful in explaining which parts of my funding package counted as earned income vs. unearned income. They see this question all the time and often have examples of how similar stipends have been treated by the IRS in the past. Also, if she does end up needing to withdraw the excess contribution, make sure she requests to withdraw the "excess contribution plus earnings" specifically - the IRA provider will calculate exactly how much earnings are attributable to that excess amount. Don't just guess at the number or withdraw a round amount, because that could create additional tax complications. Good luck to your roommate! The fact that she's addressing this now instead of ignoring it shows she's being really responsible about fixing the situation.

One more thing to consider - if your roommate does need to withdraw the excess contribution, she should make sure to do it before December 31st if possible, rather than waiting until the tax filing deadline. While she technically has until April to fix it without penalty, withdrawing earlier in the year can simplify the tax reporting. Also, I'd strongly recommend she keeps detailed records of all communications with her IRA provider about this issue. If there's any confusion later about whether the withdrawal was processed correctly or how much was attributable to earnings, having that paper trail will be invaluable. The silver lining here is that this is a learning experience that will help her avoid similar issues in future years. Many grad students don't realize how tricky the earned income rules can be with academic funding until they run into exactly this situation!

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!