Just to add another perspective - I went through this exact scenario last year. The key thing to understand is that even though you're getting a 1099-R in 2024, the earnings portion ($900.06) is technically income for 2023. This is because you're correcting a 2023 contribution. The distribution code "JP" is crucial here. The "J" means early distribution, and the "P" specifically means it was a correction of an excess contribution. This special code tells the IRS that this wasn't just a regular withdrawal, but a corrective action. You definitely need to amend your 2023 return to include those earnings as income. Use Form 1040-X and make sure to include Form 5329 to show you corrected the excess contribution before the deadline to avoid the 6% penalty.

I had this exact situation last year! The key part is understanding that when you're dealing with correcting excess contributions, you're juggling two different tax years. My advice: 1) For your 2024 return: You'll report the 1099-R distribution, but you'll need to file Form 8606 to properly categorize it as a return of excess contributions. This prevents it from being double-taxed. 2) For your 2023 return: You need to file an amended return (1040-X) to report the $900.06 of earnings as taxable income. You'll also need to file Form 5329 with the amended return to show you removed the excess before the deadline. Honestly, most tax software struggles with this specific scenario, so you might want to consult with a tax professional who specializes in retirement accounts. I know it seems like a lot of work for $900, but getting it right now prevents headaches later!

One thing to watch out for with cancellation of debt and the insolvency exception is timing. The YEAR the debt was canceled is super important. I had a similar situation where a debt was actually forgiven in 2021, but the company didn't report it to the IRS until 2022. I had to prove that my insolvency status should be evaluated based on my 2021 financial situation, not 2022 when my finances had improved. If you have documentation showing when the actual debt cancellation occurred (like letters from the lender), make sure to include that with your CP2000 response if it's different from the year they reported it.

Don't forget that responding to a CP2000 isn't your only option! If you can't prove insolvency or don't qualify, you might want to look into an installment agreement to pay the tax gradually. I owed about $2,000 from a similar situation, and I set up a payment plan of $50/month. The IRS was actually pretty reasonable about it. You can set up a plan online if you owe less than $50,000 total.

Don't forget Box 15 on your 1099-DIV should tell you how to treat the Non-Dividend Distribution. There are different codes that indicate if it's a return of capital (ROC) or something else. Most commonly it's code "R" for return of capital, which is when you reduce your basis. If the amount exceeds your basis, you record a capital gain. It's actually not that complicated once you understand the principle - they're basically returning part of your investment back to you tax-free, but tracking it by reducing your cost basis.

Just a tip - I use FreeTaxUSA for filing and it handles this situation really well. When you enter the 1099-DIV information, there's a specific field for non-dividend distributions. Then when you enter the stock sales info, it prompts you to adjust the cost basis accordingly. Much easier than trying to figure it all out manually. If the distributions are return of capital (which they usually are), the software automatically adjusts the basis. It's saved me a ton of headaches with my investment reporting.

Quick tip from someone who's been a server for years: GET A TIP JOURNAL! Record your cash tips daily, not weekly. Memory gets fuzzy and you'll either cheat yourself or risk an audit problem. I use a cheap notebook with date, shift (lunch/dinner), and amount. Takes 10 seconds after each shift. Also note any cash expenses for work - special shoes, pens, whatever. Even if this isn't your main job, doing this right will save you so much stress at tax time.

Make sure you're setting aside money for taxes regularly! I learned this the hard way. First year as a 1099 bartender I didn't save anything and got hit with a $3800 tax bill I couldn't pay. Ended up on a payment plan with the IRS which added fees and interest. Now I automatically transfer 25% of all my cash into a separate "tax" savings account each time I deposit my tips. Come tax time, I usually have a little extra which becomes a nice bonus.

As an owner of a similar sized business (6 employees) that travels to about 20 states yearly, I've found a middle ground approach. We carefully track our activities and revenue by state, then file in states where: 1. We have substantial presence (over 2 weeks) 2. We earn more than $10,000 3. We have repeat clients This approach keeps us compliant in states most likely to care while not drowning in paperwork for states where we have minimal activity. Our accounting firm is comfortable with this risk-based approach and documents our rationale for each decision. Remember that different types of taxes have different nexus thresholds - income tax, sales tax, and employment tax all have their own rules in each state!

One thing nobody has mentioned yet - check if your states have reciprocal tax agreements! Some states have arrangements where if you're already filing in one state, you don't need to file in another for the same income. Saved us tons of paperwork. Also, beware that some industries have special tax treatment in certain states - construction, entertainment, and professional services often have unique rules. What industry are you in? That might change the advice people give you.