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Does anyone know if the distribution code "1" on the 1099-R matters for how this gets reported? When I had a similar situation my form had code "7" and I think that made a difference.
Code "1" on a 1099-R generally indicates an early distribution with no known exception, which means the custodian (Vanguard in this case) is basically telling the IRS "this person took money out early and we don't know of any exception that would exempt them from the penalty." Code "7" indicates a normal distribution, which wouldn't trigger the 10% penalty automatically. The different code does make a significant difference in how the IRS initially processes the form. If you complete a proper rollover, you'll need to report it correctly on your tax return to override what the 1099-R is indicating. Most tax software has specific sections for handling rollovers that will guide you through this.
Don't forget to look into your state tax implications too! The federal 10% penalty is one thing, but some states also have their own early withdrawal penalties. I learned this the hard way in California where they hit me with an additional 2.5% state penalty on top of the federal one for an early 401k withdrawal.
A little different perspective here - i work for an accounting firm and see lots of audits. About 80% of the time, the IRS is just looking for documentation on specific deductions, not trying to "get you." Audits targeting self-employed people with home offices and travel expenses are super common right now. the absolute worst thing u can do is ignore the letter or miss deadlines. that will turn a potentially simple documentation check into a nightmare. second worst is to provide MORE info than they ask for. just give them exactly what the letter requests, nothing more.
Just went through an audit this past year and want to add that organization makes a HUGE difference. Create a simple coversheet for each category they're questioning with a summary of the expenses and why they qualify. Makes the auditor's job easier which absolutely works in your favor. Also, be super professional in all communications. The auditor has enormous discretion, and being respectful and organized gave me much better results than my friend who went in confrontational and ended up with a much more thorough (painful) audit process.
That's really good advice about the cover sheets - I wouldn't have thought of that. Did you end up owing additional tax after your audit was completed? I'm worried they're going to disallow all my legitimate business expenses.
I did end up owing a little more, but nowhere near what I feared. They disallowed about $2,100 of my $19,500 in business deductions because I couldn't find adequate documentation for some meals and entertainment expenses. My well-documented home office and equipment deductions were accepted without issue. The cover sheets definitely helped - the auditor actually commented on how easy I made their job. Each sheet listed the category (like "Home Office"), total amount claimed, how I calculated it, and an itemized list with all supporting documents attached. I even included IRS publication references showing why each deduction qualified. It turned what could have been multiple sessions into just one 2-hour meeting.
A bit off-topic, but make sure you're aware of the HSA contribution limits for 2024! They're $3,850 for individual coverage and $7,750 for family coverage. Plus an extra $1,000 if you're 55 or older. Also, don't forget that if your employer contributed anything to your HSA, that counts toward your annual limit. I almost over-contributed last year because I forgot to factor in my employer's $500 contribution.
Thanks for mentioning this! Do you know if the contribution limits are going up for 2025? I like to max out my HSA each year since it's basically the best tax advantage account out there - triple tax advantaged!
Yes, the HSA contribution limits are increasing for 2025. They'll be $4,150 for individual coverage and $8,300 for family coverage. The catch-up contribution for those 55 and older remains $1,000. You're absolutely right about HSAs being triple tax-advantaged - tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses. It's one of the best tax shelters available if you can afford to max it out and ideally pay medical expenses out of pocket while letting the HSA investments grow.
Weird suggestion but have you tried using a different tax software? I switched from TurboTax to FreeTaxUSA last year and found the HSA section wayyyy easier to navigate. It asks straightforward questions about contributions not reported on your W-2 and distinguishes between current year and prior year contributions clearly.
I second this! TurboTax has gotten so bloated and complicated. I switched to FreeTaxUSA too and it's much more straightforward for HSA stuff. Plus it's like $100 cheaper for essentially the same result.
9 I'm still waiting on my refund too, filed 2/1/25. What's frustrating is the "Where's My Refund" tool still says "Processing" with no other details. Has anyone found a better way to get actual status updates? Is calling the IRS even worth it this early in the wait?
5 In my experience, calling before the 21-day mark is pretty useless. They'll just tell you it's still within the normal processing time. I'd wait until at least 21 days have passed before trying to contact them - then at least they might give you more specific info about any delays.
16 Anyone wondering about verification letters - I worked seasonal customer service for the IRS last year, and we were insanely backed up with generating these notifications. Your refund processing isn't linked to whether you have the verification letter or not. The letter is just confirmation your return was accepted into the system.
Esmeralda GΓ³mez
Has anyone else dealt with county property tax reassessment after inheriting rental property? In my case, continuing the federal tax depreciation was straightforward, but I got hit with a massive property tax increase because the county reassessed the property value when it transferred to me. Might want to check if that's an issue in your area.
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Klaus Schmidt
β’Yes! This happened to me in California. The property taxes nearly doubled after my parents' home transferred to me, even though the federal depreciation schedule continued. Each state/county has different rules about reassessment on inheritance.
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Aisha Patel
One more tip - don't forget to depreciate the building separately from the improvements. The building itself (not including land) depreciates over 27.5 years from your date of inheritance based on the stepped-up basis. But as others said, the specific improvements like the roof continue on the original schedule. I messed this up my first year and had to file an amended return.
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