Anyone else think the W-4 system is totally broken? Why do we have to figure this out ourselves? The government already knows how much we should be paying!

This is exactly what happened to us a few years ago! We learned the hard way that claiming the same child on both W-4s is a recipe for underwithholding. Here's what we did to fix it: 1. We had the higher earner (in your case, the $70K spouse) claim the child on their W-4 2. The lower earner ($45K spouse) should file a new W-4 with "Single or Married Filing Separately" checked in Step 1, even though you're married - this increases withholding 3. Consider adding extra withholding on one or both W-4s to be safe The income difference between you two isn't huge, but the higher earner claiming the child will still result in slightly better withholding accuracy. Most importantly, get those new W-4s submitted ASAP since you're already behind on withholding for this year. Pro tip: After you make the changes, check your next few pay stubs to make sure the withholding increased appropriately. You should see a noticeable bump in federal tax withheld from the higher earner's paycheck.

This thread has been absolutely invaluable for understanding the serious risks behind these per diem schemes. As a newcomer to the contracting world, I had no idea how widespread these questionable arrangements were or how devastating the consequences could be. What really struck me was the consistency of everyone's advice - from experienced contractors to those with government compliance backgrounds, everyone is saying the same thing: these arrangements are extremely risky and not worth the potential consequences. The $40K audit story and the escalation to potential criminal fraud charges really drive home just how much is at stake. The practical advice about requesting written documentation from tax professionals seems like such a simple but effective litmus test. If recruiters are confident these arrangements are legitimate, they should have no problem providing proper backing. Their refusal or defensiveness tells you everything you need to know. For Sofia and anyone else facing similar situations, it sounds like the safest approach is to counter with a fully taxable offer at the equivalent rate and walk away if they won't restructure it properly. No job opportunity is worth risking your financial future or legal standing. This is exactly the kind of community knowledge sharing that helps people avoid costly mistakes. Thanks to everyone who took the time to share their expertise and real-world experiences!

This whole discussion has been incredibly enlightening about the predatory nature of these per diem schemes. As someone who's been in government contracting for over a decade, I can confirm that these arrangements have become increasingly common and increasingly scrutinized by the IRS. What I find most concerning is how these recruiting firms specifically target software engineers and other high-paid contractors who may not have deep tax expertise. They present these schemes as "industry standard" or "tax optimization" when they're really just shifting compliance risk entirely onto the contractor. The key point that keeps getting reinforced here is that legitimate per diem requires a genuine temporary work assignment away from your established tax home. A planned 18+ month relocation with expected permanent conversion completely fails this test under any reasonable interpretation of IRS guidelines. I've personally seen the aftermath of these schemes - contractors who thought they were being savvy about taxes suddenly facing audit bills that exceeded their entire annual savings. The interest and penalties compound quickly, and the stress of dealing with IRS enforcement can be overwhelming. For Sofia and others facing similar offers, I'd echo the advice about requesting written tax opinions and being prepared to walk away. The contracting market has plenty of legitimate opportunities that don't require gambling with your financial future. Your instincts about this being sketchy are absolutely correct - trust them.

This thread has been incredibly helpful! I'm dealing with a similar situation with my son's Coverdell ESA from Fidelity - also got a 1099-Q with blank boxes 2 and 3. One thing I want to add for anyone going through this: when you're gathering all your statements, make sure to include any year-end summaries or annual statements your provider sent you. These often have helpful breakdowns of contributions vs. earnings that can serve as checkpoints for your calculations. Also, if you've ever rolled over funds from another Coverdell ESA (like when changing beneficiaries or custodians), make sure you have documentation of the basis that transferred with those funds. That basis carries over and needs to be included in your total. The IRS Form 8863 instructions actually have a worksheet for calculating the taxable portion of education savings account distributions that might be helpful as a template for organizing your calculations. It's designed for different accounts but the methodology is similar. Thanks to everyone who shared their experiences - it's reassuring to know the IRS will accept our good-faith calculations when the custodian leaves us hanging!

I'm dealing with this exact same issue right now with my daughter's Coverdell ESA from Vanguard! Got the dreaded 1099-Q with boxes 2 and 3 completely blank, and like you, I know I'll have some non-qualified distributions this year. What's been driving me crazy is that I've been contributing to this account for over 6 years, and now I have to become a forensic accountant just to figure out my own tax liability. I called Vanguard and got the same runaround - "we don't track basis information" but they can send me statements going back to when the account opened. One thing I learned from my CPA is that you should also look for any dividend reinvestments or capital gains distributions that happened within the account over the years. These count as earnings, not basis, even though they weren't cash you deposited. They should show up on your statements but can be easy to miss when you're trying to separate contributions from growth. The silver lining is that once you go through this exercise once and create a good tracking system, you'll never have to deal with this nightmare again. I'm definitely setting up a spreadsheet to track everything going forward so my future self doesn't have to go through this stress!

Anyone know if it matters which tax filing status to pick with a partner who isnt a spouse? Like should OP file as Head of Household since they're supporting the partner and baby, or just Single? Seems like it would make a big difference for tax brackets.

Great question about filing status! You'll definitely want to file as Head of Household rather than Single since you have a qualifying child (your baby). Head of Household has better tax brackets and a higher standard deduction than Single status. The requirements are pretty straightforward in your case: you're unmarried, you're paying more than half the household expenses, and your baby lived with you for more than half the year (even if born late in the year, newborns count). Your partner's dependency status doesn't affect your ability to file HOH - having the baby as a qualifying person is enough. The tax savings from HOH vs Single filing status can be substantial, especially combined with the Child Tax Credit. Just make sure when you're using TurboTax that you select Head of Household and not Single - it'll walk you through confirming you meet the requirements but sounds like you clearly do!

Just an additional tip about Form 2441 - make absolutely sure you have the correct Tax ID number for your provider. I made a typo on mine last year and got a notice from the IRS months later questioning my childcare credit. Had to submit additional documentation to prove the expenses were legitimate. For anyone using multiple providers or having a nanny, remember each provider needs their own line on Part I, with their individual Tax ID (SSN for individuals or EIN for businesses). And keep records of payments - bank statements, canceled checks, or receipts! The IRS loves to verify these credits.

Great thread! I went through the exact same confusion with Form 2441 last year. One thing that really helped me was understanding the income phase-out for the credit percentage. At your $115,000 income level, you'll get 20% of your qualifying expenses as mentioned, but it's worth knowing that if your income was under $15,000 you'd get the full 35% rate. Also, don't forget that both you and your wife need to have earned income for the year to qualify for the credit (or one spouse can be a full-time student). Since you mentioned you both work full-time, you're good there. The $6,000 limit for two kids can be frustrating when you're paying so much more, but remember that the FSA option (if your employers offer it) can help stretch your tax savings. You can contribute up to $5,000 pre-tax to a Dependent Care FSA AND still get the credit on remaining qualifying expenses up to the $6,000 limit. Just make sure to coordinate them properly on Part III like others mentioned!