I really appreciate your great answers. Your posts are so knowledgeable, sometimes can't quite understand the technical terms - let me try to restate in my words what I think you're saying just to confirm.
2020 Questions
1. For the 2020 excess contribution, my daughter needs to file a 2020 Federal 1040 return with the $75 penalty on form 5329 - does that sound right?
2. Vanguard said they only returned the original $1,250 to my daughter and kept the earnings her Roth account. Is that the correct procedure?
3. How should I report her interest generated by the $1,250 for tax year 2020?
4. Should I mock the 1099-R now in the 2020 return we're about to file? We don't want to have to file an amended 2020 return once I receive the official 1099-R later this year.
2021 Questions
5. Our daughter's 2021 return has not been done yet because we're still figuring out 2020. I understand from your post that we have to pay 6% on that $1,250 for 2021 as well even though we withdrew the excess contributions before the April 2022 deadline. Could you please confirm if this is correct?
6. What should we include on my daughter's 2021 return so we can avoid a future amending?
Here is the background. In 2021 our daughter made $2,800 as a summer intern and received a 1099-NEC form. When plugging the numbers into her 2021 return, we learned that $2,602 was "earned income".
For this same tax year 2021, we contributed $6,000 into a Vanguard Roth for her on 7/19/21. Realizing we over--contributed by mistake, we pulled out the excess $3,398 on 3/4/22. Vanguard said $3,398 plus earnings will be returned to her bank account.
7. How should we classify the earnings from the $3,398 excess contribution? Should those go in to tax year 2021 or 2022?
8. How to enter the numbers in the 2021 return - do these answers look right? We're asking because Form 5329-T, line 18 says $4,648 but shouldn't it be $1,250?
Q: "Enter your total Roth contributions for 2021", A: $6,000
Q: "Switch from a Roth to a Traditional IRA", A: No
Q: "Would you like us to track you Roth IRA basis", A: Yes
Q: Withdraw from Your Roth IRA Before 2021, A: No
Q: Enter Prior Year Roth IRA Contributions (confirm you net regular contributions prior to 2021 that remain in your Roth IRA, A: $7,250 ($1,250 + $6,000)
Q: Any Roth IRA conversions, A: No
Q: Enter Excess Contributions (Your Excess Roth IRA Contributions for Prior Years ), A: $4,648 ($1250+$3398)
Q: How much Excess to 2021 (indicate how much of your remaining excess contribution of $1,250 you want to credit toward your 2021 Roth IRA contributions, A: 0
Q: Enter the value of your Roth IRAs on 12/31/2021, A: $8,235
Q: Contributions Withdrawn Before the Due Date 4/18/22, A: $4,648 ($1250+3398)
In the summary of "Your 2021 Deductions & Credits" page, it shows "$1352". Should it be $2,062? (1250+6000-1250-3398)
Thank you and sorry for the long post! This has been vexing us for weeks.
