BUG REPORT: 2025 IRA Recharacterization incorrectly inflating MAGI/Tax Liability (1040-X)

[acudoc37]

I have a diagnostic token at the end of the message.

I am attempting a trustee-to-trustee recharacterization of a non-deductible $7,900 Traditional IRA contribution to a Roth IRA.

The TurboTax Online software is incorrectly treating this move as an increase to my Adjusted Gross Income, causing a federal and state tax increase despite no actual change in income from the recharacterization.  This is not user error, and I spent three hours with Tax Experts today to no avail.

I have also added missing 1099-DIV/B info, very small amounts, but the tax spike is clearly tied to the IRA interview logic.

I have generated a diagnostic token so developers can see the calculation error:  1336652

Thank you, and please email me as soon as you are able to fix the bug.

[acudoc37]

Following up -- In case there is any confusion, Recharacterization of contributions is not the same as a Conversion, Rollover, or Back-door Roth.  Recharacterization of Traditional IRA contributions that were not deductible anyway because of income limit, and were not previously deducted, does not change the tax liability at all.  Speaking with a Tax Expert on the phone or in chat is not helpful with a genuine software bug, and so I am posting here, and hoping TurboTax employees take note and get this to the developers with the diagnostic token I provided -- which I would greatly appreciate.

I'm going to give this two weeks to be fixed, and if it isn't, I plan to prepare the 1040-X by hand myself without TurboTax.  I will then claim a refund under the Maximum Tax Savings Guarantee which includes a "100% accurate calculations" guarantee.

[RobertB4444]

Please clarify - when you are entering the 1099-R into TurboTax what code are you entering in box 7?

[acudoc37]

When IRA contributions for 2025 are Recharacterized in 2026, a 1099-R is not generated until 2027.  So I am not entering a 1099 for the Recharacterization.  This is normal.

Also please note that I am Recharacterizing after my 1040-SR has been completed and submitted.  I am using the Amend Return Using TurboTax Online function, which results in a 1040-X.

I have left everything I changed, without finishing the 1040-X, and you can see it using the token I provided.  When a return is amended, the tax counter at the top of the page is reset to Zeros for Federal and State, and you can see that my Recharacterization shows a tax increase of $245 Federal and $44 State.  This is not "$100% accurate calculations."

[acudoc37]

My last follow-up post got deleted, maybe because I mentioned the possibility of changing to a competitor which I named.

I am very disappointed that Support has a bias -- the bias is that TurboTax Online software is perfect, so any problem must be user error.  When someone reports a bug in the software, it seems to be ignored.  No one from software development has posted anything helpful here.  A person can waste hours and hours on the phone trying to get a bug fixed, but the bias is that there is no bug, the software is perfect, I'm just not holding my mouth right.

The truth is that TurboTax Online does not know how to handle a simple Recharacterization of Contribution, which is a trustee-to-trustee transfer from a Traditional IRA to a Roth IRA.  Pursuant to IRS Reg. 1.408A-5, this contribution is treated as having been made to the Roth IRA on the original date of the contribution to the Traditional IRA.  There is no change in tax owed if the original contribution was not deductible.  It's simple, a piece of cake, but TurboTax can't handle it.

Next step:  File a 1040-X myself, manually, without TurboTax, and claim a refund of tax preparation fees under the Maximum Savings Guarantee, for lack of "100% accurate calculations."

[RogerD1 · Accepted solution]

I've taken a look at the token that you provided.  The $7900 recharacterization is not being reported as income on your original 1040, nor is it showing up as an increase to income on the 1040-X.  Worksheets in TurboTax are showing your contribution/recharacterization as being an $8000 Roth contribution for 2025.  There is an increase of income of $1,022 on the 1040-X - in addition to adding the dividend income, did you also add a 1099-R in the amount of $1000 to your return?  This looks to be what is causing the additional tax on your 1040-X and not the recharacterization.  If you want to reply back and let us know what the 1099-R relates to and if it was added to your 1040-X - it is showing up in your entries as being fully taxable.

[acudoc37]

@RogerD1  Thank you for checking into this.  To really understand what is going on you have to look at my completed and submitted1040-SR before I started the !040-X.  On form 8606 you will see $7900 contributions to Traditional IRA.  I also made a $100 contribution to the Roth when I first opened it, so after the Recharacterization the total Roth contributions were $8,000 as you noted.  On line 13 you will see $1,000 distrubution I took from the Traditional IRA when I was in a tight.  TurboTax decided this $1,000 distribution was non-taxable.  This was the 1099-R you inquired about.

Now I understand.  Because the Recharacterization eliminated any after-tax basis in my Traditional IRA, the $1,000 distribution became taxable, and at the same time the extra income made more of my Social Security benefits taxable.  I was a dummy about this, and once again, I apologize.  it was user error after all.  I have no complaint left except that none of the Tax Experts caught this on the phone; some of them didn't know what a Recharacterization was and sent me links about Conversions; and it took a long time on this forum to get someone to really examine my unfinished1040-X.  Thank you again and be well.

Once again, I am grateful for your help with this.

[RogerD1 · Accepted solution]

I've taken another look at your token and your return does not include a form 8606.  Also the $1000 is showing up as taxable on your return.  Maybe you changed something such that this distribution is now being recognized as taxable(?).  Unfortunately, I cannot see your original 1040 in the token because the process of amending also changes the information on the 1040 so that it gets corrected to the updated information.  The $1000 of added income in itself is most of the increase in income on the 1040-X.  In addition to that, you have the dividend income that your added and there was also a $62 reduction in the level of the deduction for seniors because of the income increase.  Overall it is an increase in income of $1084.  Your level of income makes this taxable at a level of 22%.  So most of the $245 increase would be due to this increase in income.  Your original return is showing a $1248 payment (based on the 1040-X) and the revised amount due would be $1493 (excluding penalty), so the difference between these numbers would be the $245 extra payment.

Feel free to post any additional information or questions you may have.

[acudoc37]

@RogerD1 thanks again, and see my post just above your last post.  I came to the roughly the same conclusions as you.  Once again, I apologize and admit it was my error after all.