@vcwu wrote:
However, if the Net Income needs to be reported in Tax Year 2020, it will increase my AGI and therefore, readjust my allowable contribution and I would not know the exact right amount to be "remove". Like going into a loop.
Would you clarify what is the right way to report it with Turbo Tax ? I would not know how the IRA Custodian would label P, J or the code for my 1099R at this point.
You have that right. Many people fall into that trap - they remove the exact amount of the excess and do not allow for any earnings which when added to their AGI will create a new excess - in a loop. You should have more then just the exact amount of excess returned to make room for the earnings.
If this is a 2020 excess and will be returned in 2021 then the 2021 1099-R will have a box 7 code of "PJ" with the returned amount in box and and the earnings in box 2a. You will have to amend 2020 to add that when you receive the 2021 1099-R unless the IRA custodian will give you the exact amounts that will be on the 2021 1099-R so you can enter a dummy 1099-R into your 2020 tax return which would avoid having to amend when the actual 1099-R is received.
On a 2021 1099-R code "P" means returned in 2021, but taxable in 2020. Code "J" means that it is a Roth IRA.
(If returned in 2020 then it would be code "8J" with the "8" meaning that it is returned in 2020 and taxable in 2020.)
Also see box below:
*IF* you requested a return of contributions due to an excess contribution and the excess was removed before the extended due date of the 2020 tax return and the earnings were also returned and you know that the IRA custodian will report this as a return of contribution and not as a normal Roth distribution but as a return of contribution with a code "JP" in box 7 - then:
You can just report it now and ignore the 1099-R when it comes unless there is Box 4 Federal Tax withholding and/or box 12 State withholding. Then you must also enter the 2021 1099-R into the 2021 tax return since the withholding is reported in the year that the tax was withheld. The 2021 code JP will not do anything in 2021 but the withholding will be applied to 2020.
You would enter the 1099-R with the total distribution in box 1 (the contribution plus the earnings),
The earnings in box 2a,
Enter code "P" in box 7 (Top) - don t worry that it will say "taxable in 2019 "
Enter code "J" in box 7 (Bottom).
On the "Which year" screen say that this is a 2021 1099-R. - That makes it taxable in 2020 and not 2019
After the 1099-R summary screen press continue.
If you are over 59 1/2 then on the "Lets see if we can lower your tax bill" enter the box 2a amount in the "Another Reason" box to eliminate the 10% early withdrawal penalty on the earnings.
Enter the explanation for the excess contribution and that you are reporting a 2021 1099-R on your 2019 tax return to avoid having to amend in 2021.
The box 2a earnings will be taxable income reported on line 4b on the 1040 form and if under age 59 1/2 will also be subject to a 10% penalty on a 5329 form that will be reported on line 59 on the 1040 Schedule 4 form. |
**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.**
