Quick question - does anyone know if the returned earnings portion of the excess contribution is subject to the 10% early withdrawal penalty if you're under 59½? My plan administrator told me it might be, but I'm getting conflicting information.

This is a really complex situation that trips up a lot of people! I went through something similar last year and want to add a few practical tips based on my experience: 1. Get everything in writing from HR - specifically the date they're processing the correction and confirmation about the W-2 correction that Zainab mentioned. My HR initially said "early 2025" which wasn't specific enough to determine if it fell within the 2.5 month window. 2. The 1099-R you receive will be key - it should have distribution code "8" in Box 7 for excess contributions returned due to failed ADP/ACP tests. Make sure to keep this with your tax records. 3. Don't forget that if you're getting earnings returned too (which is common), those earnings are taxable as ordinary income for the year being corrected (2024 if done by March 15, 2025). The earnings portion may also be subject to the 10% penalty if you're under 59½. 4. Consider talking to a tax professional if the amounts are significant. The interaction between the returned contributions, earnings, and how they affect your tax liability can get pretty complex, especially if you're near certain income thresholds for other tax benefits. The 2.5 month rule is real and it's specifically in the IRS regulations for 401(k) plan corrections. Your HR person is correct about the timing impact on which tax year is affected.

Has anyone had issues with state tax refunds too? My federal came in 2 weeks ago but NY state is still "processing" after 6 weeks. Starting to get annoyed.

I'm dealing with the same frustrating situation! Filed electronically on February 5th and I'm still stuck at "being processed" with no updates. Like you, mine is a straightforward return - just W-2 income, standard deduction, no complications. From what I've been reading, the IRS is definitely running behind this year. They're still catching up from pandemic backlogs and have implemented stricter fraud prevention measures that are slowing everything down. The 21-day processing timeframe they advertise seems to be more like 4-6 weeks for many people this year. I'd suggest calling the IRS taxpayer assistance line if you hit the 6-week mark, but be prepared for long hold times. You can also check if your bank information was entered correctly when you filed - sometimes that causes delays too. Hang in there, it sounds like you're not alone in this wait!

Just want to add that while LLCs don't change how rental income is taxed on your personal return, they DO provide valuable liability protection. I have 3 rentals each in separate LLCs to protect my personal assets and to prevent a lawsuit on one property from affecting the others. For tax purposes, I still file everything on Schedule E since my LLCs are single-member and disregarded for tax purposes. But the legal protection is worth the annual LLC fees in my state ($125/year per LLC in my case).

One thing nobody's mentioned yet - if your overall rental losses are limited by the passive activity rules, those losses aren't lost forever! They get suspended and carried forward to future tax years when you either: 1. Have passive income to offset them against 2. Dispose of the entire passive activity in a fully taxable transaction I had suspended losses building up for years that I was finally able to use when I sold one of my properties last year. It significantly reduced my tax bill on the sale!

Sharing a tip that worked for me: If you keep getting a busy signal when faxing the Cincinnati office, try the Ogden, UT fax number instead (855-641-6935). I know technically you're supposed to use the office assigned to your region, but in a pinch, any processing center can handle your SS4. Got my EIN within 10 business days even though I'm in the Cincinnati jurisdiction. The IRS just wants the form - they don't actually care which fax machine receives it.

I've been dealing with this exact same issue for my new consulting business! After reading through all these suggestions, I ended up trying the early morning fax approach that Kaiya mentioned. Set my alarm for 5 AM Eastern and tried faxing at 5:15 AM - it went through on the first try! For anyone still struggling, here's what I learned: The Cincinnati fax lines are absolutely swamped between 8 AM and 5 PM, but there's a sweet spot between 5-7 AM Eastern when most people aren't trying yet. Also, make sure you're using the current fax number (855-641-6935 for Cincinnati) - apparently some of the numbers floating around online are outdated. One more tip: if your fax keeps timing out, try reducing the transmission speed on your fax machine. Some of the older IRS fax equipment can't handle high-speed transmissions during peak times. Saved me a lot of frustration once I figured that out!

The IRS community wisdom on this is pretty clear - these letters are essentially automatic extensions the IRS gives itself when they're backlogged. It's probably, though not certainly, related to your change in filing status. Most people in the tax community know that the IRS verification systems don't always talk to each other effectively. You might be able to see your transcript, but that doesn't mean the specific department handling your return has completed their verification process. If you've received two 60-day letters, you're almost certainly in what's called the "Income Verification" queue, which is notoriously slow. The good news is that unless there's an actual discrepancy, these eventually resolve themselves without you needing to do anything.

I'm going through almost the exact same situation! Filed jointly for the first time after getting married in December, submitted our return on February 20th, and just got my second 60-day letter yesterday. Like you, I can access all our transcripts perfectly fine and everything looks normal. What's really frustrating is that both our employers are major companies (Fortune 500) that have been filing the same W-2 formats for decades, so it's not like there should be any mystery about our income verification. I've been wondering if it's some kind of systematic issue with their new marriage verification process. The first letter came exactly 3 weeks after filing, and this second one arrived 58 days later (so they're cutting it close on their own deadlines!). I'm starting to think these letters are just automated stall tactics while they work through whatever backlog they have. Has anyone had success getting actual explanations by calling the practitioner priority line? I have a CPA who might be able to get through faster than us regular folks.