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

carso_nangress5

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?

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Comments

RyanZ

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Excess Withdrawn by April 15th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you'll need to report any investment earnings from the excess deferral as gross income for the tax year in which it's withdrawn.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.

carso_nangress5

https://community.freetaxusa.com/discussion/comment/1482#Comment_1482

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.

pnkpanda505

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~

Henry

https://community.freetaxusa.com/discussion/comment/1489#Comment_1489

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.

Conrad

I had a similar situation in 2023 and reported the distribution income on my 2023 return (corrected W-2). However the 2024 1099-R is being incorrectly counted as 2024 income in FreeTaxUSA (double taxing the same amount). How do I fix that on my 2024 return? It's not an IRA contribution and there is no obvious place to put it in deductions. (The 2024 1099-R Box 7 code is "E" but the income was already recognized in tax year 2023 on W-2.)

I guess I could mark the 1099 non-standard and change the Box 2a "Taxable Amount" to zero?

PhillipB

Hello,

If the 401K custodian issued the 1099-R using code E, the distribution is being reported to the IRS as taxable in 2024 (not for 2023). Excess contributions returned in 2024 for 2023 should have box 7 code P, not E.

I would seek a corrected 1099-R from the custodian.

Let us know if there are additional questions or concerns. Thanks for using FreeTaxUSA community

anontaxthrowaway

Has anyone concluded what to do here in FreeTaxUsa?

IRS has guidance

"Excess deferrals.

https://www.irs.gov/publications/p525#en_US_2024_publink1000229192

If your deferrals exceed the limit, you must notify your plan by the date required by the plan. If the plan permits, the excess amount will be distributed to you. If you participate in more than one plan, you can have the excess paid out of any of the plans that permit these distributions. You must notify each plan by the date required by that plan of the amount to be paid from that particular plan. The plan must then pay you the amount of the excess, along with any income earned on that amount, by April 15 of the following year.

You must include the excess deferral in your income for the year of the deferral. File Form 1040 or 1040-SR to add the excess deferral amount to earned income on line 1h."

I still can't figure out how to use 1h. I do not want to wait until 2026 and hope I get a 1099R from Fidelity. I received the excess 401k contribution as a check before April 25th, 2025, thus I want to report the income as 2024.

Only thing I and ChatGPT can come up with is stuffing in 8z under Misc. Income with a note.

Any advice?

Conrad

https://community.freetaxusa.com/discussion/comment/4371#Comment_4371

Thanks. I amended it to Code P and marked it non-standard for now. Will seek a corrected 1099-R from the custodian as well.

KeriC

anontaxthrowaway, if you've talked to your plan administrator and know you'll be receiving a 1099-R with code "P" in 2026 you could do the following to include the excess 401k contribution on your 2024 tax return to avoid having to amend your 2024 tax return later:

Get the gross amount distributed to you for excess 401k contributions from your plan administrator.
Get the taxable amount of that gross amount distributed from your plan administrator. (Roth contributions would already be included in your income so they shouldn't be included in the taxable amount here)
Enter a Form 1099-R on the Your Retirement Income (Form 1099-R) screen in the retirement income section.
Choose Form 1099-R, 401(k)/pensions/IRA distribution on the Type of 1099-R screen.
Choose Enter it Manually on 1099-R Entry Method screen.
For Box 1 enter the gross amount from your plan administrator
For Box 2a enter the taxable amount from your plan administrator
For Box 7 enter code 8. (Code 8 will cause your earnings to be reported on Form 1040 Line 1h.)

Once you receive your 1099-R with code "P" in 2026, confirm that it matches what you entered on your 2024 tax return. If it doesn't, you'll need to amend your 2024 tax return and replace the information you enter for the 1099-R above with code 8 for the information on the 1099-R with code "P" you received.

You can find this information, as well, at: https://www.freetaxusa.com/answers?faq=11426

mattn

@KeriC This information and solution is not valid, and cannot currently be done from what I can see in FreeTaxUSA. The problem is the software does not allow you to complete a 1099-R without the Payer Identification Number. I contacted my plan administrator who distributed the excess pre-tax deferrals and allocable (taxable) income. I tried to follow the steps to fill out a 1099-R to avoid amending the 2024 returns as indicated, but it won't let me finish without a Payer ID - since I won't get the actual 1099-R until 2026. Is there another way to manually address the 1040?

KeriC

https://community.freetaxusa.com/discussion/comment/4846#Comment_4846

You will need to ask the payer for their Federal EIN.

Contribution401

https://community.freetaxusa.com/discussion/comment/4847#Comment_4847

My plan administrator replied that they cannot tell me payer ID simply because they have many of them and they don't know which Payer ID will be shown on my 1099 in future. Therefore I cannot use the suggested workaround. Can I report this excess as miscellaneous income or simply add it in Box1 of W2?

KeriC

If they are not able to give you the federal EIN and don't know which company held your retirement account, your best option is to wait until you receive the 1099-R next year and amend your 2024 return at that time.