Since you are dealing with a W-2 that has $0 in Box 1 but amounts in Box 3/5 and Code II in Box 12, you should follow a modified version of the "W-2 entry" approach rather than the "Other Income" route. Here's the recommended entry.
- The most reliable way to get this accepted for e-file and have it count for your Roth IRA is to "force" the income into Box 1 so the IRS computer sees it as wages.
- Enter the W-2 exactly as it appears, but with one critical change: Copy the amount from Box 3 (Social Security Wages) into Box 1.
- Enter Box 12 with Code II and the corresponding amount.
- Proceed through the interview until you see a screen titled "Let's check for uncommon situations" or "Any of these apply to these wages?"
- Check the box for "Nontaxable Medicaid waiver payments" (also called "Difficulty of Care" payments).
- TurboTax will then ask you how much of those wages were nontaxable. Enter the full amount you put in Box 1.
By putting the number in Box 1, you match the "Earned Income" requirement for the Roth IRA. By marking it as a Medicaid Waiver payment in the follow-up screens, TurboTax creates a "negative adjustment" on your Schedule 1, Line 8. This removes the income from your taxable total, so you won’t pay income tax on it, but it still counts as "compensation" for your IRA.
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