Vanguard botched the reporting. The $559 is indeed 2019 taxable income. A $7,000 code PJ 2020 Form 1099-R for a return of a $7,000 contribution made for 2019 says that there was no investment gain or loss attributable to the $7,000 that was returned. By including the $559 on the code 8J 2020 Form 1099-R, they are saying that there was a gain of $1,292.99 attributable to a $2,153.97 contribution that was made for 2020 and returned in 2020.
You choices are to fight with Vanguard to get correct reporting or to ament your 2019 tax return to report the way that Vanguard reported it. The only problem with reporting it the way that Vanguard has reported it is that you'll have to fudge the explanations you provide for these returns of contributions to agree.
