How to properly reflect 2023 excess 401(k) deferral in FreeTaxUSA software
I overcontributed to my company's 401(k) for the 2023 calendar year by $130, and the excess deferral plus earnings are set to be distributed to me this month. I understand that I will not receive the 1099-R for the distribution until January 2025; however, I also understand that I am required to report the excess deferral in my 2023 taxes as income in line 1h of the 1040. How do I go about doing this on FreeTaxUSA?
I have heard a workaround of creating a "fake" 1099-R in the system, and inputting the excess contribution amount using Code 8, which will then populate the amount as income in line 1h. However, my concern is that FreeTaxUSA warns multiple times to ensure that the information from the 1099-R is accurate / matches what the IRS will receive, otherwise the return may be rejected. In this case, without the 1099-R to input the correct information (such as payer information, payer ID, etc.), is this workaround going to be ok? Can I just put random information in the payer information boxes so long as the actual gross distribution amount equals the amount of the excess deferral? Are there any other ways on the software to simply enter the amount into box 1h without having to fake the 1099-R?
Comments
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I advise against reporting a fake 1099-R in the FreeTaxUSA software!
Here is information from the Help screen (use the search box by clicking on the magnifying glass icon near the top of the page and search for "excess 401k")
What if I contributed more to my 401(k) than is allowed?
The 401(k) contribution limit for 2023 is $22,500 (those 50 or older can cortribute an additional $7,500). If your total contributions (also called deferrals) are more than the limit, you should ask your plan administrator to pay out the extra contributions (called an excess deferral). The plan must then pay you that amount by April 15, 2024. If the excess amount was deferred on a pre-tax basis, you may need to ask for a corrected W-2 from your employer.
Excess Withdrawn by April 15th
If you withdraw the excess deferral for 2023 by April 15, 2024, it is includable in your gross income for 2023, but not for 2024. However, you'll need to report any investment earnings from the excess deferral as gross income for the tax year in which it's withdrawn. The distribution isn't subject to the additional 10% tax on early distributions.
Excess not withdrawn by April 15th
If you don't take out the excess deferral by April 15, 2024, the excess is taxable in the year of deferral. It also isn't included in your cost basis when figuring the taxable amount of any benefits or distributions under the plan in the future. Essentially, an excess deferral left in the plan is taxed twice (once when contributed and again when distributed). Also, if the entire deferral is allowed to stay in the plan, the plan may not be a qualified plan.
Corrective distributions of excess deferrals (including any earnings) are reported to you on Form 1099-R. -
My employer / plan administrator has already stated that they refuse to issue an amended W-2. With that being the case, does FTUSA not allow me to simply report the excess contribution amount in my 1040 line 1h? If not, I will use a different service as I do not want to have to amend my return next year, whereas other services seem to have a built-in functionality to flow the excess contribution amount shown in my W-2 directly into my 1040 as income in the proper line.
Is a workaround to report this income as "other income" with the description "Excess 401K deferral", which would flow through into my 1040 in line 10? Does the IRS have a strict policy on where this type of income is reported on the 1040, as long as it's reported as income and subject to ordinary tax rates? Thanks for your help.
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Hi RyanZ,
I'd also appreciate some clarification and am in this exact situation with a slight overcontribution in 2023 that has been distributed back to me but the employer will not amend the 2023 W-2. Per IRS publication 525 the excess deferral to my 401k should be entered on 1040 line 1h, however in the FTUSA software I cannot find a way to do so.
Thanks~ -
Hi carsonangress5, you can choose to enter your information in the way that best fits your situation. However, we recommend that you wait until you get the actual 1099-R reporting that income to make sure that all of the amounts and other information (such as the code in Box 7) are entered correctly. Then the software will assign the income to the appropriate line of your tax return.
Publication 525 gives instructions on how to proceed if you cannot report the excess deferrals as wages (see" Excess distributed to you" on pg 11). It says there that if you take out the excess in 2024 and you are able to receive the corrective distribution by April 15, you only need to include it in wages for 2023. Any income on the excess deferral taken out is taxable in the tax year in which you take it out (2024).
You should receive a Form 1099-R for the year in which the excess deferral is distributed to you. However, you won't receive the 1099-R until the start of 2025 since the distribution was taken in 2024. At that time, you can amend your 2023 return to correctly input the excess. The 1099-R that will be issued to you next year reporting the return of excess contribution should indicate it needs to be entered in the 2023 software (based on the code in Box 7).
You will also use the Form 1099-R to report any earnings on your 2024 tax return. To do that, you will simply need to input the 1099-R within the 2024 software, as well. Once again, based on the code in Box 7, our program will help determine the amount taxable in 2024.
