I think this depends on the state though? I'm in Texas and we don't have state income tax, so I only needed to file the federal 1040NR. Are there any states that honor the federal treaty exemptions?

You're absolutely right that it varies by state. Texas is lucky with no state income tax! States like California and New York generally don't fully honor federal treaty exemptions, so you often have to pay state tax even on treaty-exempt income. Some states like Pennsylvania and Virginia do honor many federal treaty provisions, but it's very state-specific. A good rule of thumb is that if your state has income tax, you should research whether they honor your specific treaty benefit or file a return anyway to be safe.

Most of the mainstream tax software isn't great with international situations. I had decent luck with Sprintax which is specifically designed for nonresident tax returns, but it's not free.

OLT.com actually has a decent nonresident version that handled my 1042-S and treaty benefits correctly. It's cheaper than Sprintax but still costs about $40-50 for federal filing.

So you think this is actually a helpful service from my brokerage rather than a mistake? I had no idea they would monitor my income and make adjustments like this. Is there any way I should have known this was coming? I never saw any notifications and was completely surprised by the 1099-R.

Yes, it's definitely a helpful service - they're protecting you from potential penalties. Most brokerages include this information in their account agreements, but it's often buried in the fine print that nobody reads. They typically send notifications via your communication preferences (email, account message center, mail), but these can easily be missed. For future reference, you can usually see pending recharacterizations in your transaction history or on statements. They might be labeled as "recharacterization," "correction," or "adjustment." It's always a good idea to check if you're near the Roth IRA income limits. For 2024, the limits start phasing out at $146,000 for single filers and $230,000 for married filing jointly, so if you're in that range, keep an eye out for potential adjustments next year.

The 6% penalty isn't just a one-time thing though. It applies EVERY YEAR that the excess contribution remains in your account. So it's $168 this year, then another $168 next year, and so on until you remove the excess. Plus, you'd still need to file Form 5329 to report the excess contribution, which is another form to deal with. The recharacterization is definitely better long-term because it's a one-time fix with no penalties. Your money stays in a tax-advantaged account (just a traditional IRA instead of Roth) rather than paying penalties year after year.

I didn't realize the penalty was annual! That definitely changes things. $168 every year would add up pretty fast. Thanks for explaining - guess my brokerage did me a favor with the recharacterization after all.

Thanks for bringing this up. Do the streamlined procedures actually cover Form 5472 though? I thought those were mainly for individual tax returns and FBARs, not for business entities and their reporting requirements?

You're right that the streamlined procedures primarily focus on individual returns and FBARs. Form 5472 penalties technically aren't included in the standard streamlined relief program. However, once your friend enters the streamlined program for their personal returns, they can often make a separate reasonable cause argument for the business filings that has a higher chance of success. The IRS tends to view compliance efforts more favorably when taxpayers are comprehensively addressing all their filing obligations. So while the Form 5472 penalties aren't directly covered, being in the streamlined program can create a more favorable environment for negotiating those specific penalties through separate reasonable cause requests.

The Taxpayer Advocate Service has been completely overwhelmed since COVID. They're now only taking the most extreme hardship cases. Unless your friend can prove they're facing immediate eviction or something similar, TAS probably won't take the case.

That's an angle I hadn't considered. The grant money is from my advisor's research funding, and I'm definitely working on their project rather than just my own educational pursuits. The money is paid biweekly like a salary, but it's never been called a salary explicitly - it's always referred to as a "research stipend." Does that distinction actually change how I should report it on my taxes?

Yes, the distinction can definitely change how you report it! If the money is compensation for services rendered (which sounds possible in your case since you're working on your advisor's project and being paid regularly like a salary), it would be treated as employment income rather than a scholarship/fellowship. In that case, the university should have issued you a W-2 for that portion of income. But universities are notoriously inconsistent with how they classify these payments. Some will issue 1099-MISCs for research stipends, while others report them as scholarships on the 1098-T, and some don't report them at all (expecting you to self-report).

This is excellent advice. I work in a university accounting office, and I can tell you that how the university reports these payments matters a lot. If they issued a W-2 for any portion, that's definitely reported as wages. If they included the research stipend on the 1098-T as a scholarship, that's how the IRS will expect to see it reported.

Thanks for this info! I had no idea there were "marketplace facilitator" laws. Do you know if there's an easy way to check what my state requires? I've been collecting and remitting sales tax on the full amount (including their commission) which sounds like it might be wrong.

The easiest way to check is to google your state name plus "marketplace facilitator sales tax law" - most states have published guidance specifically for restaurants dealing with delivery apps. In most states that have these laws, the delivery apps should be giving you reports that show what portion of sales tax they collected vs what you need to collect. If you've been remitting tax on the full amount including their commission, you might actually be overpaying! You might want to look into filing an amended return to get that money back. Some of my restaurant clients have received significant refunds after realizing this mistake.

On the tax-exempt topic - be super careful with catering orders for churches and non-profits. I learned the hard way that in my state, they need to provide their exemption certificate BEFORE the sale, not after. Had to eat the tax cost on a $2000 order because they gave me their certificate a week later!