Just to add to the education expenses discussion - I used that exception last year as a grad student. For the "qualified higher education expenses" remember it includes: 1) Tuition and fees 2) Books, supplies, equipment required for enrollment 3) Room and board IF you're at least half-time student 4) Computer equipment/software/internet access if required The withdrawal doesn't have to directly pay for these things - you just need to have incurred these expenses in the same tax year as the withdrawal. Also, you can only use expenses that weren't paid for by tax-free education assistance (scholarships, grants, etc).

One thing nobody's mentioned yet - when you take early distributions from retirement accounts, make sure you properly report ANY exceptions on Form 5329. Even if you qualify for an exception, if you don't file this form correctly, the IRS computer system will automatically assess the 10% penalty. I learned this the hard way last year when I took a distribution for qualified higher education expenses but didn't properly code it. Got a lovely letter from the IRS saying I owed penalties plus interest. Had to file an amended return with Form 5329 completed correctly.

Has anyone used FreeTaxUSA for this kind of situation? I'm in the same boat (1099-K with about $15k but actual profit only $280) and wondering if it handles this well. TurboTax keeps trying to charge me extra for the Schedule C even though I barely made anything.

This is such a common confusion point! I went through the exact same thing last year with a similar situation - 1099-K showing around $19k but net profit of only $320 after legitimate business expenses. Here's what I learned after researching extensively and talking to a tax professional: Even though you're under the $400 self-employment tax threshold, you should still file a return with Schedule C to report the income and expenses. The key reason is that the IRS already knows about that gross income from PayPal's 1099-K reporting. If you don't file, their automated matching system will likely flag the "missing" income and you could get a CP2000 notice asking you to explain the discrepancy. It's much easier to file now showing how your expenses reduced that gross amount to under $400 than to deal with notices later. You won't owe any self-employment tax since you're under $400 net profit, and if this was your only income and you're under the standard deduction, you probably won't owe any income tax either. But filing creates a clear paper trail that prevents future headaches with the IRS matching system.

Don't forget to keep REALLY good records of any medical expenses related to your wrongful termination - therapy, doctors visits, medication, etc. Those can potentially offset some of the taxable portion related to emotional distress. I made the mistake of not tracking all my expenses properly and probably missed out on some deductions. Learn from my fail!

I completely understand your anxiety about this - settlement taxes can feel overwhelming when you're already dealing with the stress of a legal battle. The good news is that you're asking the right questions early, which puts you ahead of many people. Here's what you need to know immediately: You'll likely receive either a 1099-MISC or possibly a W-2 (if the settlement is treated as back wages). The taxable amount is generally what you actually received, not the gross settlement before attorney fees. Since your lawyer took 33%, you'd typically pay taxes on your net amount (~$58,625), though recent tax law changes allow you to deduct attorney fees in many cases. For a settlement this size, you should absolutely make an estimated tax payment for Q1 2025 to avoid underpayment penalties. A rough estimate would be to set aside 25-30% of your net settlement for federal taxes, plus whatever your state rate is. The key is getting clarity on how your former employer will report this payment. Contact them or your attorney ASAP to understand whether they're treating it as wages, general damages, or a mix. This determines your tax treatment. Consider consulting with a tax professional who has settlement experience - the cost will likely save you much more than you spend, especially given the complexity and your anxiety about getting it right.

Has anyone had experience with how refinancing affects this situation? I did seller financing 3 years ago, and now the buyer wants to refinance with a traditional bank. I'm trying to figure out if I'll get hit with a big tax bill and lose my healthcare subsidy all at once when they pay off the remaining balance.

This is such a complex situation that intersects tax law and healthcare policy! I went through something similar when I sold my condo with owner financing last year. One thing I learned that might help is to consider the "subsidy cliff" at 400% of the Federal Poverty Level. If your installment payments push you just over that threshold, you lose ALL premium tax credits, which can be devastating. But if you're well under or well over that line, the incremental impact might be more manageable. I ended up working with a tax professional who specialized in ACA implications because the interaction between installment sale reporting and MAGI calculations is really tricky. They helped me model different payment structures to see how each would affect my healthcare costs over the life of the loan. Also worth noting - if you're close to retirement age, the timing becomes even more important since Medicare eligibility at 65 eliminates the ACA marketplace concerns entirely. Something to factor into your decision if you're in that age range. The key is running the numbers for your specific situation rather than trying to apply general rules, since everyone's income profile and subsidy eligibility is different.

Just want to add a warning for the original poster - fixing this sooner rather than later is important. I had a similar situation but ignored it for years. When I finally tried to withdraw some money from my IRA, it became a complete nightmare proving which portions were non-deductible contributions. I ended up having to go through old bank statements and tax returns to piece together evidence for the IRS. They initially wanted to tax my entire withdrawal, including the portion that should have been tax-free return of already-taxed contributions. The whole ordeal took months to resolve.

Has anyone actually calculated if making non-deductible traditional IRA contributions makes sense compared to just investing in a regular brokerage account? Since you're paying taxes now AND paying taxes on the earnings later, it seems like the math might not work out in favor of the traditional IRA in this case.