For tax year 2020, I contributed $7,000 in after-tax dollars to my Roth IRA. While doing my taxes in Mar'21, I found out my AGI was in the phase-out range ($196,000-$206,000) for IRA contributions. TurboTax calculated that I could make a partial contribution of $3,760 so I contacted my brokerage company in Mar'21 to withdraw the excess $3,240 plus earnings.
In 2022 I received a 2021 1099-R showing removal of the $3,240 + $1,670 in earnings. Now I am amending my 2020 return to add the $1,670 earnings to my gross income. Because I am in the IRA contribution phase-out range, the additional $1,670 in gross income reduced my allowable IRA contribution form $3,760 to $2,590. This means I now have a new excess contribution of $1,170 in the IRA. I will need to contact the brokerage company again and request another excess withdrawal. The earnings from the excess $1,170 will again increase my AGI and again reduce my allowable IRA contribution. This cycle will repeat over and over, each time adding earnings from another excess contribution to my AGI and again reducing my allowable IRA contribution.
How do I correctly handle this situation on my tax return?
