@test29 wrote:
Dana, thanks for the detailed explanation; is there a reason/logic behinds that one pays tax for 2020 excess contribution on 2020 tax year (in 2021 april) while pays tax for 2020 earning from excess contribution on 2021 tax year ( in 2022 april)? Why not pay both on 2020 tax year in 2021 april?
Because tax law says that the tax on the excess contribution must be paid in the tax year that the excess occurred (it was deducted from your W-2 box 1 income for that year so you must replace it), but it continued to earn interest (earnings) until removed so the earnings are taxed in the year actually returned.
For information see IRS Pub 525 page 10
https://www.irs.gov/pub/irs-pdf/p525.pdf
**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**
