Do you know if we need to get the 1099-R corrected before we file, or can we just file with the explanation that it's incorrect? The tax filing deadline is coming up soon and I'm worried the credit union won't fix this in time.

You really want to get the corrected 1099-R before filing if at all possible. Filing with an explanation that contradicts the 1099-R information the IRS has on file often triggers correspondence audits or notices. If you're running close to the deadline, file an extension to give yourself more time to get this corrected. An extension gives you an additional six months to file (though not to pay, but in this case the correct tax should be much lower or zero). The credit union should be able to issue a corrected 1099-R within a few weeks if they acknowledge their mistake.

Actually, the 10% early withdrawal penalty doesn't apply to distributions to beneficiaries after death, even if the beneficiary is under 59.5. That's one of the exceptions listed in the tax code. But they would still owe regular income tax on the distribution if it's not corrected.

This is so true! I used to go to one of those chain tax places and when I finally switched to a CPA, the difference was huge. Worth every penny, especially for self-employment stuff.

Do you set aside a separate bank account for this? I've tried to do quarterly payments but always end up spending the money I should be saving for taxes.

Yes, I have a separate savings account specifically for taxes! This was game-changing for me. Every time I get paid, I immediately transfer 30% to this account. I don't even think of that money as mine - it's already the government's money that I'm just holding temporarily. Some banks let you create sub-accounts with different names, which helps mentally. I named mine "NOT MY MONEY - TAXES" to remind myself not to touch it except for quarterly payments. Having it separate from your main checking account removes the temptation to spend it.

Wait really? Interest on tax payments can be deducted? That's amazing, I paid about $400 in interest because I was on a payment plan. Do you know which form this goes on?

That's a great point. I've been ignoring my credit card statements because they stress me out, but that's obviously making things worse. Have you had any personal experience with these hardship programs? I'm wondering how understanding they actually are.

I went through this myself during 2020. I called all three of my credit card companies - two offered to reduce my interest rate by about half for 6 months, and one actually gave me a 3-month payment pause without additional interest accumulating. The key is to call before you miss payments. They're much more willing to work with you if your account is still in good standing. Be prepared to explain your situation briefly and have a specific request in mind. Sometimes they'll offer options right away, but other times you need to directly ask "Do you have any hardship programs available?" or "Can you reduce my interest rate while I get back on track?

Adding to this - if you do find a medical collection, call the collection agency and ask for "debt validation" before you pay anything. They're required by law to prove the debt is yours. I've had medical bills dropped completely because they couldn't provide proper documentation.

How bad are the penalties? I'm a student and only work during summer and winter breaks. I claimed exempt last December because a friend told me to, but now I'm worried I screwed up.

The underpayment penalty isn't usually massive - it's basically like interest on the amount you should have paid throughout the year. For 2023, the rate has been around 6-8%. But the bigger issue is just having a surprise tax bill when you file. If you're a student who only works during breaks, you might actually qualify for exempt status if your total annual income is below the standard deduction (which is $13,850 for 2023 if you're single). Check your total income for the year - if it's below that threshold, you likely won't owe any federal income tax and claiming exempt was probably correct.

You're misunderstanding how the exempt status works. Claiming "exempt" isn't something you do just for high-income periods. It's a declaration that you expect to have ZERO tax liability for the ENTIRE tax year. If you expect to owe any federal income tax for the year as a whole, you cannot legally claim exempt for any part of the year, even for just one pay period. The IRS looks at your tax situation annually, not month by month.