Quick question - I have a 1099-R with code "7" in Box 7. What does that mean? The state is saying I owe taxes but I thought I qualified for an exception.

Code "7" indicates a normal distribution, which is generally fully taxable at both federal and state levels. Unlike code "G" (which indicates a rollover), code "7" distributions don't qualify for tax-free treatment. If you believed you qualified for an exception, you may be thinking of a specific situation like being over 59½ (which exempts you from the early withdrawal penalty but not the income tax), or possibly a qualified disaster distribution. These would still be taxable income even if the 10% penalty was waived.

I successfully disputed a similar situation. The key was getting a corrected 1099-R from the financial institution. In your mom's case, she needs to track down that old employer's 401k administrator - usually a company like Fidelity, Vanguard, etc. Even if the employer is gone, the administrator should still exist. What likely happened is either an administrative change in the plan or they may have forced a distribution if the account was small and inactive for many years (some plans automatically distribute accounts under $5,000 if you're no longer an employee). If she never received the money, they might have sent it to the state as unclaimed property!

That's a good point, but isn't the higher standard deduction also part of TCJA and set to expire? So wouldn't the standard deduction also go back down in 2026, making itemizing more likely again?

You're absolutely right - I should have mentioned that. The increased standard deduction is indeed part of TCJA and scheduled to expire after 2025. Pre-TCJA, the standard deduction was much lower (around $12,700 for married filing jointly in 2017, adjusted for inflation). If no legislation is passed, the standard deduction would indeed drop significantly in 2026, which would make itemizing deductions beneficial for many more taxpayers. So the combination of lower standard deduction, unlimited SALT deductions, and higher mortgage interest cap could create a substantial change in tax strategy for homeowners in high-tax states.

The $750k mortgage interest deduction limit is per return, not per person. So on a joint return, your total limit is $750k regardless of how many borrowers are on the mortgage. If you file separately, each spouse gets a $375k limit. This is also true for the pre-TCJA $1M limit that would return after 2025 if no new legislation passes. On a joint return it would be $1M total, or $500k each if filing separately.

We did file within the 30-day window! Our lawyers were really strict about that deadline. We didn't have any external investors at the exact time we incorporated and issued the initial shares. We did have some friends/family invest about 3 months later at a slightly higher valuation though. Would the IRS look at that later valuation and try to apply it retroactively to our founder share purchases?

Good that you filed within the 30-day window - that's a common mistake that can't be fixed later. The IRS generally wouldn't apply a later valuation retroactively if there was a legitimate basis for the initial valuation. At formation, with no product, revenue, or investment, valuing common shares at just above par value is typically reasonable. The key is whether there were any substantive negotiations or commitments from investors already in place when you incorporated, which might suggest a higher valuation already existed. The 3-month gap before your friends/family round provides decent separation, and startups often see legitimate value creation in those early months that justifies a higher valuation. Just make sure you have documentation of the company's state at incorporation versus 3 months later to show real progress that warranted the increase.

I've seen it happen. Friend was audited last year and the IRS specifically questioned the valuation used for their founder shares. They had purchased at $.001 but had term sheets from investors at $.08 in progress when they did it. IRS argued they'd undervalued by millions and owed taxes on the difference. Huge mess.

Did you do it yourself or use a tax professional? I'm trying to figure out if I can handle an amendment myself or if I need to pay someone.

I did it myself using the same tax software I originally filed with. Most of the major tax platforms have an amendment feature that helps walk you through the process. It pre-fills a lot of the information from your original return, so you only need to focus on what's changing. I found it pretty straightforward, especially since I was just adding business expenses to my Schedule C. If your amendment is more complicated (like changing filing status or something more substantial), then getting professional help might make sense. But for adding missed deductions, you can probably handle it yourself.

File them separately! I made the mistake of trying to deal with everything at once and it created a huge mess. Do your 2023 taxes normally, then handle the 2022 amendment after. Keeps everything cleaner and prevents confusion.

Can you still make that election now? Or was that something that had to be done on the 2020 return?

Unfortunately, the election to report the full amount in the first year had to be made on your original 2020 tax return. Since you already reported only 1/3 of the distribution as taxable in 2020, you're now locked into the three-year reporting method. The only way to change this would be to file an amended 2020 return (Form 1040-X), but that has risks and costs that likely outweigh any potential benefits at this point. You'd pay interest and possibly penalties on any additional tax from reporting the full amount in 2020, plus you'd draw additional scrutiny to your return.

You can repay a CARES Act distribution within 3 years of the date you received it to avoid taxes on the repaid amount. So if you took it out in July 2020, you have until July 2023 to put it back. You'll need to file amended returns to get back any taxes you already paid on the portions reported in 2020 and 2021.