How to properly reflect 2023 excess 401(k) contribution in FreeTaxUSA

conrad

My wife over-contributed to her employer 401(k) in 2023. The excess contribution was withdrawn before April 2024, and the income was accounted in our 2023 taxes on form W-2.

In 2025, we received a 2024 1099-R which lists the full withdrawal as taxable (Box 2a). The 1099-R Box 7 code is "E." When this is input to FreeTaxUSA, it treats it as 2024 income, and so we end up double-taxed on the amount.

What is the right way to mark the 1099-R income as non-taxable or already paid? Is there some offsetting credit hidden somewhere, or do we need to mark the 1099-R non-standard and manually adjust Box 2a? Or Box 7?

Dream_Home_Mortgage

Since the excess contribution was included in 2023 taxable income, the 1099-R you received in 2025 for tax year 2024 should not be taxed again. However, FreeTaxUSA (and many other tax software programs) might not automatically recognize that this income was already taxed in the prior year.

How to Correct This in FreeTaxUSA (or Any Tax Software)

1. Verify Box 7 Code ("E")
   • Code "E" on the 2024 1099-R means that the amount is an excess deferral that was corrected in time.
   • This means the withdrawn amount itself is not taxable again in 2024, but any earnings on the excess contribution (if any) are taxable in 2024.
2. Manually Adjust Box 2a (Taxable Amount)
   • If FreeTaxUSA automatically enters the full Box 1 amount as taxable income, you must adjust Box 2a to exclude the excess contribution amount, leaving only the earnings (if any) taxable in 2024.
   • If Box 2a (taxable amount) only includes earnings, then no change is needed.
3. Check for a Worksheet or Adjustment Section
   • In FreeTaxUSA, navigate to the section handling 1099-R corrections or adjustments to taxable income.
   • If there's an option to mark the amount as already reported in 2023, use that.
4. Attach an Explanation Statement (if Necessary)
   • While not always required, it can be helpful to include an explanation in your tax return stating:
     "Excess 401(k) contribution of [$X] was reported as income in 2023 and withdrawn in 2024. The 2024 Form 1099-R incorrectly includes the same amount as taxable. Only earnings, if any, should be reported as income for 2024."

If FreeTaxUSA Does Not Allow a Direct Adjustment

If the software does not allow an easy adjustment, an alternative method is:

• Report the full 1099-R amount as received, but then enter an offsetting negative adjustment under "Other Income Adjustments."
• Enter a description such as:
  "Adjustment for excess 401(k) contribution previously included in 2023 income."

Key IRS References

• IRS Pub 525 (Taxable and Nontaxable Income) confirms that excess deferrals are taxable in the year contributed, not the year withdrawn.
• IRS Instructions for Form 1099-R clarify that Box 7 Code "E" refers to a timely returned excess contribution, which should not be taxed again.

Final Steps

• Ensure that your 2023 return correctly included the excess contribution as taxable.
• Only pay tax in 2024 on any earnings from the excess contribution.
• If needed, manually adjust the 1099-R entry or include an "Other Income Adjustment" to correct for the double-taxation.

This should prevent the excess contribution from being taxed twice while ensuring compliance with IRS rules. 🚀