Is there a specific form the parents need to fill out to confirm this was a gift under the annual exclusion? I always thought there was paperwork for the giver.

The parents would only need to file Form 709 (Gift Tax Return) if their gift exceeded the annual exclusion amount per recipient. For 2022, that threshold was $16,000 per person. So if both parents contributed to the gift, each could give up to $16,000 (total $32,000) without any filing requirement. For responding to the IRS notice, there's no specific form the parents need to complete. A simple signed and dated statement explaining the gift (including amount, date, occasion, and relationship) should suffice. Including evidence like copies of checks, transfer receipts, or bank statements showing the source of funds would strengthen the case.

This is an excellent point. I got a fake IRS letter once that looked really convincing! You can call the IRS directly (using the number from their official website, not the letter) to confirm if they actually sent you something.

1 I thought I was eligible because I'm single with one job and no dependents. What other factors would make me need to claim 0 instead of 1? I don't have any side gigs, but I do have some investments that pay small dividends (maybe $2k per year).

3 Those investment dividends could definitely be part of your problem! Even $2k in dividend income doesn't have any tax withheld, so you need to account for that separately. With the new W-4 form, you'd add this as "other income" in Step 4(a). Also, if you receive any bonuses or commission that are taxed at a flat 22% supplemental rate, this might be less than your actual tax bracket if your income is high enough, creating a shortfall at tax time.

16 I second this! I use H&R Block and their tax planning tool caught that I was going to owe about $4,500. I immediately updated my W-4 to take out an extra $375 per month for the rest of the year. Still owed a little but WAY less than I would have otherwise.

Thanks for mentioning the distribution code! I just checked my statement and it looks like they used code "1" which I guess means early distribution. Should I call them and ask them to change it to code "8"? Or can I just explain the situation on my tax return regardless of what code they used?

I would definitely call your IRA custodian and explain the situation. Ask them if they can issue a corrected 1099-R with code "8" since this was intended as a return of contribution in the same year. Having the correct code will make the process much smoother and reduce the chance of IRS questions. If they won't or can't issue a corrected form (some are more helpful than others), you can still proceed by filing your return with an explanation attached. Just be aware this might increase the chance of questions or even correspondence from the IRS since the form code won't match your explanation.

I actually did this with Vanguard a couple years ago. The key was that I caught it and called them within like 2 weeks of the distribution. They were able to basically cancel it and redo it properly before they had sent the withholding to the IRS. But I think once they've sent that money to the government, you're probably stuck waiting for your tax refund.

Nondividend distributions are reported in Box 3 of Form 1099-DIV. They're not reported as income on your tax return, but instead they reduce your cost basis in the investment. You only keep track of these reductions until you sell the investment, at which point your capital gain/loss calculation will use the reduced basis. If the nondividend distributions ever exceed your cost basis (rare but possible with long-held investments), then the excess amount becomes reportable as a capital gain in the year received.

This is super helpful, thank you! I definitely didn't understand the difference between regular dividends and nondividend distributions. So basically I paid tax now on something I didn't need to pay tax on until later? I guess I'll just make a note of this for my records. The shares are in my long-term investment account so I probably won't be selling for many years anyway.

This is such a great analogy! I'm going to use this next time someone tries to tell me I should keep debt around for tax purposes. It's amazing how many otherwise smart people fall for this.

Not a dumb question at all! There are a few reasons: 1. It WAS more valuable before the standard deduction nearly doubled in 2017. Many more homeowners itemized then. 2. For people with very large mortgages (like in high-cost areas) who have enough deductions to itemize anyway, it still provides some tax benefit - though they're still paying more in interest than they save in taxes. 3. Real estate agents, mortgage lenders, and others in the industry have incentives to promote homeownership, and the tax deduction sounds like a great selling point. 4. Financial myths tend to persist, especially when they're repeated by seemingly knowledgeable people (like financial advisors who should know better!) 5. Most people don't actually calculate the true cost vs. benefit - they just hear "tax deduction" and think "free money.

Thanks for explaining this so clearly! It makes so much more sense now. I guess I should be more skeptical when I hear about "great tax advantages" without seeing the actual numbers worked out.