TT and 401k over-contribution

[bha44]

Here is an illustration of a situation when IRS 401k limit was $22,500.

Emp 1 - Wage $100,000, 401k $16,000 ---> Wages in box 1 = $84,000
Emp 2 - Wage $50,000, 401k $12,000 ---> Wages in box 1 = $38,000

I would have assumed that TT would calculate line 1 wages as $100,000+$50,000+($28,000-$22,500) = $155,500. Will TT alert me about this or do I have to explicitly add it back somewhere.

Thanks!

[MinhT1]

Yes.

To avoid the avoid the excise tax of 6%, you have to withdraw the excess contributions before tax day, April 18, 2023. You also have to report the excess contributions on your 2022 tax return.

Pages 10 and 11 of IRS Pub 525 under Excess deferrals (the IRS term for 401K contribution is deferral) tells us: 

If your deferrals exceed the limit, you must notify your plan by the date required by the plan. If the plan permits, the excess amount will be distributed to you. If you participate in more than one plan, you can have the excess paid out of any of the plans that permit these distributions. You must notify each plan by the date required by that plan of the amount to be paid from that particular plan. The plan must then pay you the amount of the excess, along with any income earned on that amount, by April 15 of the following year. You must include the excess deferral in your income for the year of the deferral. File Form 1040 or 1040-SR to add the excess deferral amount to your wages on line 1a.

What you earned will be covered by a 1099-R for the following tax year and will be entered then as a normal 1099-R. 

Below is how to do this in TurboTax:

1. Click on Federal in the left-hand column, then on Wages & Income
2. Continue and locate the section Less Common Income
3. Select Miscellaneous Income and click Start
4. Select Other income not already reported on a Form W-2 or Form 1099 and click on Start
5. Answer the question "Did you receive any other wages?  Yes
6. Click through the questions till you get to Any Other Earned Income
7. Answer Yes to Did you earn any other wages?
8. Indicate Other as Source of Other Earned Income and click Continue
9. For the description enter "2022 Excess 401K Deferrals" and click on Done

[bha44]

Thank you for the steps. Why does TT not recognize this instead of having to manually input it. Any ideas on why it is not auto corrected by tax software?

[DanaB27]

No, TurboTax cannot create the needed entry automatically but it will give you a warning about the excess deferral. The W-2 will have to be entered as shown on the form and then you will add the excess deferral to your wages with the steps Tax Expert MinhT1 mentioned above. 

You can ignore the warning once you added the excess deferral and took corrective actions since you don't have a 6% penalty calculated for an excess deferral (this penalty only applies to excess IRA contributions).

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.

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 on April 15, 2024. Two 2023 Forms 1099-R will be issued reporting the excess:

• Form 1099-R with code P in box 7 can be ignored if you reported the excess as described above in 2022. 
• However, the earnings on Form 1099-R with Code 8 in box 7 should be reported in 2023.

@bha44