That's interesting! So are you saying some providers might actually allow employee contributions after December 31st, or is it more about how they classify the contributions internally? Has this approach ever caused issues with the IRS for you?

It's more about how they classify contributions internally. The IRS rules are still the same (employee contributions by Dec 31, employer by tax filing deadline), but some providers don't track the distinction in their system - they just report the total contribution amount. This approach hasn't caused me problems, but it requires careful record-keeping on your end. You need to document what portion was intended as employee vs employer when you file your taxes. The risk is if you exceed your allowed contribution limits for either category. I always consult with my tax professional to ensure my allocations are correct before finalizing my tax return.

Thanks for clarifying this! A lot of people confuse the deadline for establishing the plan with the deadline for contributions. I learned this the hard way last year when I set up my Solo 401(k) in February for the previous tax year, thinking I could still make employee contributions. Expensive lesson!

How much of a tax deduction did you actually get from doing this? And what percentage of the settlement amount do you receive as income each year? I'm trying to figure out if this makes financial sense.

My tax deduction was about 25% of the amount I put into the trust, so roughly $105,000, which I was able to use that year and carry forward some to future years since it exceeded my deduction limits. I receive about 5% of the trust value each year as income, which is around $21,000 annually. You can set different percentages based on your needs - anywhere from 5% to 50% technically, though most are in the 5-8% range. The payments can be fixed or variable depending on how you structure it. The key benefit was avoiding a massive tax hit in a single year while still having access to income from the full amount.

Unfortunately, Section 1031 exchanges only apply to business or investment real estate, not to settlements. Your brother-in-law is probably confusing it with other tax deferral strategies. For your settlement, you're better off looking at the options mentioned above like non-qualified assignments or potentially a charitable trust if that aligns with your goals. Section 1031 wouldn't be applicable to settlement funds.

Thanks for clearing that up. I had a feeling he might have been mixing things up. Appreciate the quick correction - saved me from going down a useless research rabbit hole!

I tried this route and it was a nightmare. The software technically "allows" you to adjust basis, but doesn't help you calculate what the correct basis should be. I ended up paying a CPA $350 to fix my return after I'd already spent hours trying to figure it out myself.

I do this too! Way easier to just have my primary employer take out an extra $200 per paycheck than mess with the withholding on smaller jobs. Just calculate your expected additional tax from all side gigs, divide by the number of paychecks from your main job, and add that amount to your withholding.

Thanks for confirming this approach! It's worked really well for me. One thing to add - if you go this route, make sure you're not having too much withheld just because it's easier. I review my withholding about halfway through the year to make sure I'm on track.

That's really helpful to hear from someone in almost the exact same situation! I think I'll start with having them withhold $100 from each check and see how that looks. Thanks for the perspective!

I hadn't even thought about checking my credit report. That's a really good point. Do you know if business debts always show up on personal credit reports? And if I do find something, should I dispute it the same way as the tax debt?

Business debts can absolutely show up on your personal credit report, especially if the business was a sole proprietorship or if your father used your personal information to guarantee any loans. Even with corporations or LLCs, lenders often require personal guarantees from owners for small businesses. If you find unauthorized accounts or loans, you would dispute them differently than tax debt. For credit report issues, you'd file disputes directly with the credit bureaus using their fraud departments. You may also need to file a police report for identity theft, which some creditors require before removing fraudulent accounts. This is separate from the IRS process, but equally important for your financial health.

Intent doesn't really matter when you're talking about $105K in tax debt that could follow this person for life. Even if the father meant well (which seems doubtful), he's essentially saddled his child with a massive financial burden without consent. That's not something you do to someone you care about, regardless of intention.