All amounts shown in box 1 of a Form 1099-R are considered to be income. In the case of a nontaxable rollover, it is not taxable income. Even though it is not taxable income, it must be reported on your tax return to tell the IRS that you rolled the money over to another retirement account. The nontaxable income has no effect on the amount of your refund or your taxes due.
"Even though I’m not being taxed my income is higher and it’s being counted as a withdrawal."
As it should be. The amount of income included on your tax return is higher, but your AGI remains unchanged. Because your AGI remains unchanged, there are no side effects of including nontaxable income on your tax return.
