That's a really good point, I didn't even think about the company deducting it on their end. I'll definitely tell him to keep all the settlement paperwork and document everything. Would you recommend he send in any specific documentation with his tax return, or just keep it all on hand in case of questions?

I wouldn't send any extra documentation with the return itself. The IRS doesn't want that unless they specifically ask for it. Just have him keep all the settlement documents, correspondence, and proof of the payment amount in a safe place for at least 7 years (the extended audit timeline). Also, when he reports it on Schedule 1, Line 8z, he should write a brief description like "Breach of contract settlement" next to it. That shows transparency and makes it clear he's not trying to hide anything.

Sometimes companies refuse to issue 1099s for settlements because they don't want to admit liability. I had this happen and my accountant said to just report it anyway. The IRS cares more that YOU report income than whether THEY issued the proper form.

This is really helpful! The company classified me as an independent contractor (hence the 1099-NEC), but I'm wondering if the treaty might view it differently since I only work for this one company. How do I figure out if I'm considered an employee or contractor under the treaty specifically?

The treaty doesn't specifically define employee vs contractor, so it generally follows the classification principles of each country. The IRS looks at factors like behavioral control, financial control, and relationship of the parties. Since you only work for one company, that's a factor that could potentially point toward employment, but there are many other factors. Do they control when and how you work? Do you use your own equipment? Do you have the opportunity for profit or loss? These all matter for classification.

There is indeed a totalization agreement between the US and Canada! If you're paying into the Canadian social security system (CPP), you generally don't have to pay US self-employment taxes. You'll need to get a certificate of coverage from the Canadian authorities though.

Thanks for bringing this up! I definitely need the money sooner rather than later. Quick question - do you know if GLACIER tax prep software is good for this situation or should I just try to file directly?

GLACIER is actually quite good for international student tax situations. Many universities provide it free to their international students. It's specifically designed for nonresident tax filing and handles the special forms and tax treaty provisions that apply to international students. If your university doesn't provide free access, you could also look into using the IRS Free File program or one of the commercial tax software options with specific international student support. The key is making sure whatever you use can properly handle Form 1040-NR and any required attachments like Form 8843.

This is super important! I'm from the UK and because of the tax treaty, I was able to exclude some of my research stipend from being taxed. Saved me over $1200. The tax treaty articles are different for each country.

Is there a time limit on recharacterization though? OP is talking about a 2021 contribution which was over 2 years ago. I thought recharacterization had to be done before the tax filing deadline?

You're absolutely right, and that's a critical point I should have clarified. Recharacterizations do need to be completed by your tax filing deadline including extensions (typically October 15th of the year following the contribution). For a 2021 contribution, that deadline has long passed, so recharacterization isn't an option anymore. At this point, the return of excess is indeed the only way to correct the issue. Thanks for pointing this out - I should have been clearer about the timing limitations.

That's a dangerous approach to take. Yes, the excess contribution penalty is 6% per year, but it continues EVERY year until you fix the problem. So it's not just a one-time $270 penalty - you'd pay that $270 every single year indefinitely until you correct the excess contribution. Plus, having known excess contributions in your account could potentially cause issues if you ever get audited. The IRS might view it as an intentional violation once you're aware of the problem. Better to fix it now and just pay the penalty for the years it was already in there.

That makes sense, I didn't realize the penalty continues every year! Definitely not worth saving a little hassle now to keep paying penalties forever. Thanks for explaining that - I'll call Vanguard tomorrow to start the process of removing my excess contribution too.

How did you find a specialist who knew both business exits and real estate? I'm in a similar situation but everyone I talk to seems to know one area well but not both. Did you use a Big 4 firm or a boutique?

I actually avoided Big 4 firms after interviewing two of them. Found our specialist through a real estate investment group I belong to - several members had used this boutique firm that specifically focuses on business owners with significant real estate portfolios. The key was finding someone who understood the intersection of business exit planning and real estate optimization - not just someone who happened to work with both separately. I'd recommend asking for specific examples of cases where they've handled both aspects together, not just checking boxes for experience in each area.

TaxPro Premier worked decent for me last year with RSUs and options, but completely failed with my private equity investments. I ended up having to use a combination of software for initial organization and then an actual CPA to review everything. Paid more in the end but avoided some serious mistakes the software made with my cost basis calculations.