Has anyone had success fighting a CP2000 for HSA distributions online through the IRS response portal rather than mailing everything? I'm wondering if I should just use their online system or if it's better to send a physical response with all my documentation.

I dealt with this exact same situation last year! You're absolutely right to question it - HSA distributions for qualified medical expenses shouldn't be taxable. The problem is that the IRS computer system sees your 1099-SA showing the distribution but doesn't automatically know it was for qualified expenses. Even though your 1099-SA has Distribution Code 1, you still need to file Form 8889 with your tax return to officially report to the IRS that these were qualified medical expenses. Without Form 8889, their system assumes the entire distribution is taxable income. For your CP2000 response, I'd recommend: 1. Complete Form 8889 for the tax year showing your qualified medical expenses 2. Include copies of your 1099-SA forms 3. Attach receipts or documentation for the medical expenses that match your distribution amounts 4. Write a cover letter explaining that these were qualified medical expenses Keep copies of everything you send! The IRS should accept your explanation once they see the proper documentation. I went through this process and they completely reversed the proposed tax after reviewing my Form 8889 and supporting documents.

I'm going through something similar - filed my 2023 return in March and got stuck in "Action Required" status after ID verification in October. What helped me was calling the Taxpayer Advocate Service (1-877-777-4778) after hitting the 12-week mark. They can actually see what's causing the hold and sometimes expedite the review process. Also, try checking your IRS online account if you haven't already - sometimes there are notices posted there before they mail the physical copy. The "Action Required" message is super vague but usually means they're doing income/withholding verification or checking your Head of Household status eligibility. Don't lose hope! I know it's frustrating but most of these manual reviews do eventually clear. Keep documenting everything like Laura said - dates, reference numbers from calls, etc. You're not alone in this mess! 🤞

Been dealing with this exact same situation! Filed my 2023 return in April and got the "Action Required" status after ID verification in November. What finally worked for me was getting my account transcript from the IRS website - it showed specific transaction codes that explained what they were actually reviewing (in my case it was income verification from a W-2 mismatch). The key thing to understand is that "Action Required" doesn't always mean YOU need to do something right away. Sometimes it just means they're waiting for their internal systems to complete cross-referencing your info with third-party sources like employers or banks. I'd recommend ordering your 2023 Account Transcript online if you can access your IRS account - look for any 400+ codes which indicate what type of review they're doing. If you see codes like 424 (income verification) or 430 (dependent verification), that gives you a clearer picture than the vague WMR message. After 10 weeks I finally called and they told me the review was actually complete but hadn't updated in their system yet. Got my refund 2 weeks later. Hang in there - I know it's super stressful but most of these do resolve eventually! 💪

Has anyone used a structured settlement instead of taking a lump sum? My tax guy mentioned this might help spread out the tax burden over multiple years.

Great question about EEOC settlements! I went through this exact situation about 18 months ago with a $95K settlement. Here's what I learned that might help: First, make sure your settlement agreement clearly breaks down what each portion represents - back pay, compensatory damages, punitive damages, attorney fees, etc. This is crucial for tax purposes. Back pay gets treated as W-2 wages (subject to employment taxes), while compensatory damages are taxable income but not subject to employment taxes. One key thing - if you had any documented physical symptoms from the workplace stress (ulcers, migraines, high blood pressure, etc.), those portions may qualify as tax-free under IRC Section 104(a)(2). You'll need medical documentation linking these conditions to the workplace discrimination. Also consider timing - if you're close to year-end, you might want to delay the settlement payout until January to push the tax liability into the next year, especially if you expect lower income next year. The "higher tax bracket" fear is common but remember that tax brackets are marginal - only the income above each threshold gets taxed at the higher rate, not your entire income. Still, spreading it out through installments or maximizing deductions can definitely help reduce the overall tax hit. Definitely consult with a tax professional who has experience with employment settlements - regular accountants often miss the nuances of these cases.

Don't forget that even though you report the income in the year you receive it, the character of the income (ordinary income, capital gains, tax-exempt income, etc.) flows through from the trust to you. The trust should provide a detailed K-1 showing the breakdown of what types of income are included in your distribution. This is important because different types of income are taxed at different rates. For example, if part of your distribution represents long-term capital gains realized by the trust, that portion would be taxed at the preferential capital gains rates on your personal return.

Quick heads up - if your trust distribution was large (over $15,000 in 2022/2023), make sure the trustee isn't confusing the 65-day rule with gift tax reporting. I've seen this happen where trustees think the beneficiary needs to report large distributions as gifts, but trust distributions aren't considered gifts for tax purposes (the original transfer to the trust may have been). Trust distributions are generally reported as income by the beneficiary (unless they're distributions of principal, which usually aren't taxable). The gift tax annual exclusion amount ($17,000 for 2023) isn't relevant to trust distributions.

Great thread everyone! As a parent who just went through this process with my twin boys last year, I wanted to share a few additional insights. We ended up creating a separate "college application fund" early in their junior year specifically for all the non-529 eligible expenses mentioned here. One thing I learned the hard way: don't forget about CSS Profile fees if your kids are applying to schools that require it for financial aid. That's another $25 per school plus $16 for each additional school report. Also, if your student is applying to competitive programs, some require additional fees for auditions, portfolios, or supplemental applications that can add another $50-100 per school. My advice would be to start budgeting now for roughly $200-300 per school when you factor in application fees, test score sends, and any program-specific requirements. Keep those 529 funds safe for the guaranteed expenses once they're actually enrolled. The peace of mind is worth avoiding any potential penalties or tax complications!

As someone who works in college admissions, I wanted to add a few money-saving tips that might help offset some of these application costs that can't be covered by 529 funds: 1. Fee waivers - Many colleges offer application fee waivers for students who qualify based on income or participation in programs like free/reduced lunch. Don't assume you won't qualify - the income thresholds are often higher than expected. 2. Apply early decision/early action where possible - Some schools waive application fees for early applicants or offer reduced fees. 3. Visit virtual campus tours first - Most schools now offer comprehensive virtual experiences that can help you narrow down which schools are worth the expense of an in-person visit. 4. Look into SAT/ACT fee waivers - Low-income students can get up to 4 free SAT attempts plus free score reports to colleges. 5. Some schools participate in "application blitzes" or have special free application periods - usually announced on their social media or websites. While it's disappointing that 529 plans can't cover these pre-enrollment costs, there are definitely ways to reduce the financial burden. Every dollar saved on applications is more money available for actual college expenses!