Get your taxes done using TurboTax
Please be aware, the basis and value of a traditional IRA are two different things. The basis is nondeductible contributions (after-tax contributions). The value at the end of the year you find on your end of the year statement, it consists of the contributions, earnings, and rollovers.
The calculation would be like shown below (this is done on Form 8608):
Value in traditional, SEP, and SIMPLE IRA on Dec 31, 2021 $20,000
Distributions $0
Conversions to Roth $ 5,000
Total $25,000
Basis $5,000
$5,000/$25,000 = 0.2
Nontaxable Conversion part $5,000 x 0.2 = $1,000
Therefore $4,000 are taxable.
The basis of $4,000 can be used for future distributions and conversions.
As you can see from the calculation it is important to keep track of your basis on Form 8606 through the years. Furthermore, because of this allocation, a backdoor Roth only works correctly if all traditional, SEP, and SIMPLE IRA are empty before starting making contributions using the backdoor Roth technique.
You mentioned that you recharacterized a 2020 contribution. I assume your wife had contributed to a Roth IRA for 2020 and then it was recharacterized as a traditional IRA and made nondeductible. Therefore, you would have a $2,000 basis from the prior year which you will have to enter when TurboTax asks (steps 6 and 7 below). You should be able to see your basis on the 2020 Form 8606 line 14.
- Click on "Search" on the top right and type “1099-R”
- Click on “Jump to 1099-R”
- Click "Continue" and enter the information from your 1099-R
- Answer questions until you get to “Tell us if you moved the money through a rollover or conversion” and choose “I converted some or all of it to a Roth IRA”
- On the "Your 1099-R Entries" screen click "continue"
- Answer "yes" to "Any nondeductible Contributions to your IRA?" if you had any nondeductible contributions in prior years.
- Answer the questions about the basis and value
To enter prior-year basis screen:
To enter the end of the year value screen:
