Confused on how to report 457 excess contribution b/c it consists of tax-deferred and Roth

[Have a nice day]

In 2022, my wife switched employers and accidentally over-contributed to her 457 plans. Combined for both employers, she contributed $21,006.68 (W-2, box 12, code G) to the tax-deferred 457. To the 457 Roth (W-2, box 12, code EE), she contributed $1,624.97. This makes for a total tax year 2022 457 contribution of $22,631.65.

1) I understand that the excess is reportable on our 2022 return, but because it consists of both tax-deferred and Roth, that is where I am confused. Is it simply $2,131.65 is reportable as other income 1040 line 1h?

2) The excess to the tax deferred ($21,006.68 - $20,500 = $506.68) and the Roth $1,624.97 together total $2,131.65. In essence, she's already had payroll taxes taken out of the $1,624.97 since it was a Roth contribution. If we report it as excess, then the $1,624.97 will then be taxed again.

I just don't understand if it is handled differently since contributions were made to both tax-deferred and Roth.

From reading the IRS regulation and here at the community, I understand that if/when Fidelity reports any earnings on this excess contribution, that it is reportable for tax year 2023, correct?

[DanaB27 · Accepted solution]

Yes, any earnings distributed with your returned excess will be reported on your 2023 tax return.

It depends on where she is removing the excess from. If she only has it returned from the tax-deferred account then she will have to add the full amount ($2,131.65) to the wages with the steps below (reported on line 1h of Form 1040).

If she takes $1,624.97 out of the Roth and $506.68 of the tax-deferred account then she would report only $506.68 on line 1h of Form 1040.

Please be aware, if you do not take out the excess amount by April 15th, then you are taxed twice on the excess deferral left in the plan.  This happens once when you contribute it and again when you receive it as a distribution. You can't include the excess amount in the cost of the contract even though you included it in your income.

Please follow the steps below:

1. Login to your TurboTax Account 
2. Click "Wages & Income" (under Federal) on the left side of your screen
3. Scroll  down to "Less Common Income" and click "Show More"
4. Scroll down to "Miscellaneous Income, 1099-A, 1099-C" and click "Start"
5. Select "Other income not already reported on a Form W-2 or Form 1099" and click "Start"
6. On the "Did you receive any other wages?" screen answer "Yes" and click "Continue"
7. Continue until you get to the "Any other earned income" screen, answer "Yes" and click "Continue"
8. On the "Enter Source of Other Earned income" screen select "Other" and click "Continue"
9. On the "Any Other Earned Income" screen enter "2022 Excess 401(k) Deferrals" for the description, enter the amount and click "Done".

If you receive the distribution of the excess deferral and earnings by April 15th then please note for the Tax Year 2023 tax filing due April 15, 2024: 

• Form 1099-R with code P in box 7 can be ignored if you reported the excess as described above in 2022 (for the tax-deferred account). 
• If the distribution was for a 2022 excess deferral to a designated Roth account, your Form 1099-R should have codes B and P in box 7. Don’t add this amount to your wages on your 2022 return. 
• However, the earnings on Form 1099-R with Code 8 in box 7 should be reported in 2023.

Please see Pub 525 for additional information.

[Have a nice day]

Awesome! Thx Dana.

I understand your response. One question though is will you please clarify your statement below?

“You can't include the excess amount in the cost of the contract even though you included it in your income.”

did you mean I can’t include the excess amount in our cost basis? I don’t understand what you meant by contract.

Other than that, thanks again. Very helpful, BTW, the $2131.65 is getting returned from her tax deferred 457. So I will report that as other income.

[DanaB27]

Yes, you can’t include the excess amount in your cost basis if you get the excess deferral for 2022 distributed after April 15th, 2023. In this case, you can't claim that you paid already taxes on the excess deferral amount (by adding it to your wages) because it has to be taxed twice. 

But it seems this doesn't apply to you since you are getting the funds returned before April 15th.

Yes, you will add $2,131.65 on line 1h of Form 1040 with the steps provided previously.

[Have a nice day]

Got it DanaB27. I thank you so much for your help and assistance!

[Have a nice day]

Hi DanaB27 and Community!

Yesterday we got the return of excess contribution from Fidelity. I was expecting the $2131.65, however it was $2076.59.

One plus is that we are not gonna have to report earnings in 2023, but the downside is that this has got me confused if we report the $2076.59 or $2131.65 on 1h of Form 1040. I have a feeling it’s the latter because that is what we put into the account, I just wanted to verify this. Will you let me know Dana, or other community members?

[DanaB27 · Accepted solution]

It seems you had a loss. You will still report the full excess deferral on your 2022 tax return ($2,131.65).

But the loss will have to be reported next year on your 2023 tax return:

1. Login to your TurboTax Account 
2. Click "Federal" from the left side of your screen
3. Scroll down to "Less Common Income" and click "Show More"
4. Scroll down to "Miscellaneous Income, 1099-A, 1099-C" and click "Start"
5. Select "Other reportable income" and click "Start"
6. Answer "Yes" to "Any Other Taxable Income?"
7. Enter "Loss on Excess Deferral Distribution” and enter the loss as a negative number (-$55.06)

Please see Pub 525 for additional information.
 

@Have a nice day 

[Have a nice day]

Great. Thanks.

Since there are no earnings on the $2131.65, I did not think that anything is reportable since there was a loss. I had to look things up on the link you provided for Pub525 and see if my simple tax brain could understand things.  I found this:

Report a loss on a corrective distribution of an excess deferral in the year the excess amount (reduced by the loss) is distributed to you. Include the loss as a negative amount on Schedule 1 (Form 1040), line 8z, and identify it as “Loss on Excess Deferral Distribution.”

If my simple tax brain understands this, it like you said above that this year 2023, I report the loss of 55.06 (2131.65 - 2076.59 = 55.06).