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@impuesto88 wrote:

Hi community, please help me with my tax case involveing recharacterization and backdoor conversion, and there is capital gain as well. I tried to make things organized (did some rounding of numbers) and informative as follows.

 

Timeline

1. In Oct 2020 I moved $6000 directly into my Roth IRA account from Chase Checking, without realizing I wasn't eligible to contribute even a penny (I'm eligible in prior years though)
2. But when I realized that in Nov 2020, there was already $1000 capital gain in the Roth IRA account
3. My broker did a recharacterization in Nov 2020 on the entire 6000 contribution (number expected in line 1 of 8606), and transferred 6000+1000 = 7000 (number in 1099-R) into my brand new traditional IRA account
4. And shortly afterwards (still in Nov 2020) my broker helped me convert all $7000 from trad IRA to my Roth IRA account (to accomplish the backdoor steps), 
5. As the result of the above steps, I received 2 1099-R forms
   1. the one for Roth IRA account has distribution code N, box 2a = 0,  box 1 = 7000
   2. the one for trad IRA has distribution code 2, box 1=box 2a=$7000, and the IRA/SEP/SIMPLE box checked

 

Questions:

1. How do I properly report all of these in Turbotax? I followed the following steps but I think it is wrong.
   1. I go to Deductions & Credits for Traditional and Roth IRA Contributions interview
   2. I started with only Roth IRA (it is going to ask me about recharacterization to trad IRA)
   3. Afterwards I go to Wages & Income to import the 2 1099-R forms
   4. However when I preview the generated 8606 form it is shown that I'm taxed on 3500 (exactly half) of the 7000 shown in 1099R (line 10 where the ratio is supposed to be calculated has an X instead of a numeric value), line 1,3,5 are all 7000, line 2 is 0 (this is my very first 8606, so no basis from prior years)
   5. Basically what should be the right number on line 18 of form 8606? I think I should pay tax on $1000 (the capital gain)
2. Should I withdraw the $1000 capital gain? The turbotax interview is saying I contributed an excess 1000 dollars and will need to pay 6% penalty.
   1. If I do that before May 17 would I receive some form from my broker to help report such distribution?

 

Thanks so much for your help !

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You reported the recharacterization improperly.    ONLY the exact amount of the contribution was recharacterized - not any earnings. 

The proper way to report the recharacterization and earnings which is to enter the  IRA contribution in the IRA contribution interview section and then say yes to "Did you switch from a Roth to a Traditional IRA - recharacterize".

The amount The amount of the original Roth contribution must be entered - not any earnings or losses.

Then TurboTax will ask for an explanation statement where it should be stated that the original $xxx.xx plus $xxx.xx earnings (or loss) were recharactorized.

There is no tax or penalty on the before-tax earnings since the earning were simply switched into the recharactorized account.