excess traditional IRA contribution but not deposited

[astro46]

I used TT to efile 2024 taxes. I entered Simple IRA contribution and Traditional IRA contribution.  TT reviewed, showed no alerts or warnings, and efiled.  The Simple was tiny (about $1000, all of my self employed income. I am self employed and retired) and Trad IRA a bit less.  I live off social security.  Everything I have read indicates that it is ok to take both, they are separate if high income isn't a factor.  TT didn't object.

A couple of weeks later, I am about to send the Traditional IRA money to brokerage and wanted to check the tax form to make sure of the amount.  I was shocked to see that TT filed it as non-deductible and an excess contribution. Plus there was a 6% tax on the excess contribution. Again, No warning from TT about this. 

IRS just deposited my refund, less than what TT promised, IRS saying that there was an error in social security calculations. 

What is the best way to deal with this situation?  At this point I am not inclined to argue with IRS about the  Social Security calculation. But what about the alleged excess traditional IRA contribution?  

What if I just don't deposit the funds?   Will the issue disappear? Will the 6% tax be returned?

Or deposit the funds and withdraw the same day to get a1099-R return of excess. 

Should I not deposit the funds, but file an amended 1099X showing no traditional IRA contribution?

[MaryK4]

If you were not qualified to make the contribution, you can choose not to make the contribution.  You will have to amend your return to correct the excess contribution penalty- which is probably a good idea.  You can make all the corrections and then it should match what the IRS calculated for the taxable social security.  

If you have questions as you do the amendment, please let us know.  

[astro46]

thanks.  

I will need the 1040-X form,

and 8879?

if I am telling IRS that no trad IRA was deposited, therefore no excess and no 6% tax what form do I need to show that change?

Since no excess, no frm 8606 was necessary.  Leave out a form 8606? or send with zeros? or not send and mention in explanation?

Any other forms I may need to think about changing and send?  Worksheets?

I guess I need to wait to get IRS explanation in mail before doing anything, yes?

[fanfare]

first make a copy of your originally filed return or turbotax will overwrite it.

Then you can use TurboTax to amend and e-File a corrected return.

In Explanation you can say why Form 5329 and Form 8606 have dropped off your tax return. (i.e. no contribution)

The penalty on Form 5329 will be returned to you.

You should make sure your social security Line 6 is correct.

e-File of Form 1040-X makes your life much simpler.

The fact that you never made the IRA deposit certainly helps.

@astro46 

[astro46]

Should I wait to get IRS explanation about increasing my tax, apparently because TT made an error in Social Security calculations?

How do I integrate this info into the 1040-X filing?

[fanfare]

since TurboTax marked non-deductible, your tax on SS is not going to change when you delete the contribution.

You have to find out why IRS changed that tax and include that change in your amendment.

@astro46 

[fanfare]

ALTERNATIVELY

If IRS sent you a bill you can  pay and include that amount on Form 1040-X Line 16.

In explanation you state:

"I accept your change to my 1040 SS Line 6. I am filing 1040-X to remove IRA penalty Schedule 2 Line 8. No contribution was made."

[astro46]

fanfare:  IRS did not send a bill.  They sent the remainder of my refund (reduced by 25% because of the stated Social Security calculation error.)  The link included in the online explanation indicates a worksheet to be used to calculate taxable SS 'unless you contributed to a traditional ira and are included in a retirement plan at work'.  this is from pub 915.   

Perhaps the traditional IRA is what caused IRS to recalculate taxable portion (assuming this is the issue), however this doesn't explain why TT didn't use the correct form to begin with. 

 I tried going into my already filed 1040 and removed the Traditional IRA contribution.  My refund immediately dropped by about 50%.  TT already considered it non-deductible, and excess, so why this happened makes no sense to me.   

This is really confusing.  Will I have to try redoing the taxable SS form, see if it is different than the one TT filed and amend it?  Or do I just let IRS know that Traditional IRA was never sent in, and the forms 5329 and 8606 are removed, then let them redo the SS form, refund the 6% penalty tax,  and recalculate refund?

[fanfare]

as I stated earlier, compare 1040 Line 6 of original return with Line 6 of your revised 1040 after amendment.

if your tax goes down more than the amount of penalty after amending,

you should understand why (no confusion) before filing .

FYI many forum users complain that the TurboTax amendment process fails i.e. wrong result.

[fanfare]

to compare returns for amendment purposes

get paper copies of original and revised, lay them side by side and go through each page.

This is why it is important to print the original return.

@astro46 

[astro46]

I received explanation from IRS.   Indeed, using numbers off the TT 1040 and the IRS 1040 instruction Social Security Benefits worksheet,  I came up with taxable SS of 3236.    TT came up with 2214.  I don't know how that could happen.  It's pretty simple adding, dividing, and subtracting. 

What will make things worse is that TT deducted the non deductible, excess, undeposited Traditional IRA from IRA distributions, so the number TT listed on line 4b is wrong. 

And, and,   I have no idea how TT came up with tax on line 16.  Income of $6134 on line 15 should be, from tax table, $613,  not the $184 shown by TT.  How did it do that?  And how is it IRS didn't find this?

Am I missing something(s?) here?

At this point, after correcting the SS amount, taxable IRA distributions, and correcting Tax amount, I may owe money rather than the TT refund.