We are a married filing jointly couple who are trying to figure out why the TMV of our IRAs caused our federal refund amount to drop by thousands of dollars. Usually stuff makes sense, but I can't fathom why the TMV of our retirement accounts change the amount of our 1099-R income.
Context:
We contributed $6,500 each to traditional IRAs on Jan 1 2023 (we have been maxing these our for the past 10 years). In August we bought a house, and took out $10,000 each to assist with the down payment.
Going through TurboTax, we put in the $13,000 traditional IRA contribution (turns out we made too much money to get the deduction this year), and then the $20,000 withdrawal on the 1099-Rs, which nets to a $7,000 withdrawal. Taxes are owed on the $7,000+a 10% penalty. We get asked about prior year nondeductible contributions and I say no. Once we get to the screen for exceptions we put that $10,000 each went to a primary residence and the 10% penalty is removed because it's a qualifying exemption. Federal refund is at about $3,000. Then I realize we made a mistake, our income was a bit too high to make the full deductible contribution back in 2022, so we have a form 8606 with a total basis of over $5,000 each. we put that in and our refund goes up to $5000 (and we pat ourselves on the back for a good catch). Then it says, now enter your TMV from form 5498. We enter the totals... federal refund drops to $1,000. What the heck is going on? Why does the current TMV of our IRA accounts impact how much our refund is? Looking at 'income' the 1099-R the value changes based on the TMV for the IRAs which seems to be the cause. So our question, which hopefully someone can help with, is: Why? Is that correct? Shouldn't that 'total basis' value in our IRA be money we can withdraw tax free since it wasn't tax deductible/deducted in the first place? We're very confused. Thanks in advance to anyone who can help figure this out.
