Wait, so there could be ANOTHER limitation beyond the basis issue? So even if I figure out the basis part and have enough basis to take the loss, I might still not be able to deduct it because of these passive activity rules? Does that mean the loss just disappears completely?

The loss doesn't disappear completely - it gets suspended and carried forward to future tax years. You can use these suspended passive losses when you either generate passive income from other sources or when you completely dispose of your interest in the partnership. The passive activity rules are separate from basis limitations, so you need to clear both hurdles to claim the losses in the current year. First, you need sufficient basis, and second, you need to have either passive income or qualify for the special allowance. If you don't meet these conditions, the losses get carried forward until you do.

TurboTax can handle the data entry part fine, but in my experience, it doesn't help much with calculating your adjusted basis or determining loss limitations. I ended up having to do those calculations separately and then just entering the final numbers. The software doesn't track your basis from year to year either, which becomes a real problem if you hold these investments long-term.

That's really helpful to know! So if I understand correctly, I can still use the 4868 payment option even though I've already filed? And the IRS will just apply it to my balance due without me needing to do anything else?

Yes, that's exactly right. When you make the payment, the IRS system is mainly concerned with getting your money and correctly identifying which taxpayer account to apply it to. They'll automatically apply any payment to your outstanding balance. The form number you select mainly helps their internal routing but has no impact on your already filed return. Just make sure you use the same SSN/name as your tax return so it gets matched to your account correctly.

Yeah good luck with "just call the IRS" - have you tried calling them recently? I spent 4 hours on hold last week and never got through. That's why services like Claimyr exist in the first place.

Oh man I didn't even think about state taxes! Does anyone know if I need to contact my state tax department proactively or wait to see if they send me something?

It depends on your state, but most states automatically receive information from the IRS about adjustments to federal returns. However, you usually need to be proactive and file an amended state return rather than waiting for them to contact you. In most states, you have a certain timeframe (often 60 or 90 days) after finalizing changes with the IRS to submit an amended state return without additional penalties. If you wait for them to notice and contact you, you'll likely end up paying more in interest and possibly penalties too.

Is it better to mail the response or use their online portal if available? I've heard horror stories about mailed documents getting lost.

Thank you for pointing this out! I was actually confused about which tax year to report the missed distribution in. So to clarify - we take the missed 2022 RMD amount now, report it on our 2023 taxes, but file the Form 5329 with our 2022 taxes (or separately if we already filed)? And we still need to take the full 2023 RMD by the end of this year? That means double distributions this year, right?

That's correct. The missed 2022 RMD that you take now will be reported on your 2023 tax return because that's when you actually received the money. The Form 5329 reporting the missed RMD goes with your 2022 return because that's the year you were supposed to take it. Yes, you'll need to take both distributions this year - the missed 2022 one and your regular 2023 RMD. This sometimes creates a slightly higher tax situation since you're bunching two distributions in one tax year. If the combined amount might push you into a higher tax bracket, you might want to talk to a tax professional about timing the distributions to minimize the impact.

Good point about the spousal vs non-spousal differences. My understanding is that spouse beneficiaries have more flexibility. Can you explain what documentation we should keep if we're trying to get a waiver? Did your father use a tax professional for the appeal?

Yes, that's correct. Settlements for physical injuries are generally not taxable (excluding punitive damages). However, settlements for emotional distress WITHOUT physical injury are typically taxable. The IRS views emotional distress as taxable even if it resulted in physical symptoms (like headaches or stomach issues). Only settlements specifically for physical injuries or physical sickness are tax-free. If your settlement was purely for emotional distress from workplace discrimination with no physical injury component, it would be taxable income that should be reported on Schedule 1 (not as self-employment income).

I've worked with several clients who reported 1099-NEC settlements correctly on Schedule 1 instead of Schedule C, and none have been audited specifically for this issue. The key is documentation - keep your settlement agreement and a brief explanation of why you're reporting it differently than the form indicates. Remember, the IRS computer systems will notice the discrepancy (1099-NEC reported but not on Schedule C), but having proper documentation ready is your best defense. It's actually riskier to incorrectly pay self-employment tax on settlement income than to properly report it as other income.