1099-R amount being taxed when I converted a non-deductible traditional IRA to a Roth in my 2019 return

[Gurujee]

I entered the 1099-R from Vanguard and contacted Vanguard when I found the non-deductible portion was being taxed. Vanguard said that it must be a Turbo tax problem since the form they sent is correct. 

Entered the 1099-R with Box 1 and Box 2a contribution of $7000 and Box 7 code = 2

> Based on your Box 7 Entry you do not need to pay any extra taxes on the money taken out of your account

Here is what I selected subsequently

> Moved the money to another retirement account

> Converted all this money to a Roth IRA account

Answered ‘Yes’ I made and tracked non deductible IRA from 2018 and prior years (have done this back door Roth conversions in prior years without a problem)

> Total basis on Dec 2018 = 0

> Value of traditional SEP Simple IRAs on Dec 2019 = 0

The above steps taxes the non deductible IRA amount

Turbotax IRA Worksheet shows

Line 590: ‘2019 Conversion contributions taxable at conversions” =  $7000

Line 60: ‘2019 Conversion contributions not taxable at conversions” =  0

[dmertz · Accepted solution]

The result suggests that either you have not yet entered under Deductions & Credits any contribution made to the traditional IRA for 2019 in 2019 or your traditional IRA contribution is deductible and you did not indicate to TurboTax to make it nondeductible..

[Gurujee]

Thanks, that did it. Once I entered the Deductions and Credits part, it removed the taxes

[Joebatters]

Hello -  I am experiencing the same issue of being taxed for converting an IRA, even though Turbotax is telling me it's an untaxable event.  It appears the taxing takes place when I enter my contributions (under the deduction section) between January 2020 and July 2020.  Do you have any suggestions to correct? 

Thanks,

Aaron

[macuser_22]

Contributions made in 2020 for 2019 cannot be applied to a 2019 conversion since that money did not exist in the IRA at the time of the conversion.   How did the money that was converted get into the Traditional IRA?

[dmertz]

TurboTax is telling you that code 2 means that there is no additional tax, meaning that there is no 10% early distribution penalty.  The conversion is still generally taxable.  As macuser_22 indicated, TurboTax is likely preparing Form 8606 to show that your basis in nondeductible traditional IRA contributions made for 2019 in 2020 is not available to reduce the taxable amount of this distribution and it's likely that the entire conversion is taxable unless you had basis in nondeductible traditional IRA contributions from prior years that you failed to enter.  The basis that is not applied to your 2019 Roth conversion will be applied to a future distribution, perhaps a Roth conversion you may have already done in 2020.

[Joebatters]

Ahh, you're correct, macuser!  My 2019 schwab 1099-R is for my 2018 contribution that was converted in 2019.  Now I need to figure out what to do with the 1099-R.

[macuser_22]

Did you deduct it in 2018 or was it non-deducible?

If non-deductible and you did not report it on your 2018 tax return on a 8606 form with the deduction online 1 and 14 (if you had no 2018 IRA distribution), then you need to file a 2018 8606 to report it.    You use the 2018 8606 line 14 amount when entering the 2019 1099-R into the 2019 tax return.

2018 8606 -  https://www.irs.gov/pub/irs-prior/f8606--2018.pdf

2018 instructions - https://www.irs.gov/pub/irs-prior/i8606--2018.pdf

[Joebatters]

Yes, I had an 8606 for 2018 and nondeductible contributions.  My total basis on line 14 was zero.

Hmm, so, I should enter zero in box 1 (gross distribution) and 2a (taxable amount) for my 2019 1099-R? 

[macuser_22]

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@Joebatters wrote:

Yes, I had an 8606 for 2018 and nondeductible contributions.  My total basis on line 14 was zero.

Hmm, so, I should enter zero in box 1 (gross distribution) and 2a (taxable amount) for my 2019 1099-R? 

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Were the 2018  contributions on line 1 on the 8606 and did you also have a 2018 1099-R for a 2018 distribution?     The only way a 2018 contribution on line 1 would be zero on line 14 would be if the line 1 contribution  was used to offset the tax on a 2018 distribution on lines 6-15.

[dmertz]

The basis added with a 2018 contribution could have been entirely applied to a 2017 distribution or conversion if 2018 TurboTax used Worksheet 1-1 from IRS Pub 590-B, leaving 2018 Form 8606 line 14 iwth $0 as long as the 2017 year-end balance was zero.  The result in 2018 TurboTax seems to indicate that 2018 TurboTax is not using Worksheet 1-1 but is instead doing the entire calculation directly on Form 8606.

(I haven't figured out a good way to predict whether or not TurboTax will use Worksheet 1-1.  There are cases where Worksheet 1-1 must be used, but it seems to me that TurboTax sometimes used Worksheet 1-1 in cases where it is inappropriate to use it, cases where it's clear to me that there is no potential for deducting the IRA contribution.)

[Joebatters]

Ugh, the one year I hire a CPA they filed my 8606 incorrectly.

My 2018 8606 should've had an amount on Line 14.  I have entered my 2018 basis into my 2019 return and see the conversion is now not taxable.

Macuser_22, thank you for your patience, clear explanations, knowledge, and quick replies! 

[dmertz]

If your 2018 Form 8606 is incorrect, it will need to be amended.  Given that you paid for the service and assuming that you provided the CPA with all of the correct details regarding your traditional IRA contribution for 2018, the CPA should correct their error at no cost to you.

[macuser_22]

@dmertz My reading of both the 8606 instructions and Pub 590B says the worksheet is only used if the IRA contribution is only partly deductible due to income deduction limits.   Simply choosing to make the entire contribution non-deductible should always use the 8606 and never the worksheet.

The line 4 instructions say that you can choose to make the contribution non-deductible and "Although the contributions to traditional IRAs for 2019 that you made from January 1, 2020, through April 15, 2020, can be treated as nondeductible, they aren’t included in figuring the nontaxable part of any distributions you received in 2019."

It  also says: "If you used the worksheet Figuring Your Reduced IRA Deduction for 2019 in Pub. 590-A, enter on line 1 of Form 8606 any nondeductible contributions from the appropriate lines of that worksheet."

I read that to day that if part of the contribution is not deductible because it is "reduced" only then is the worksheet used.

Is this a TurboTax Bug?

[macuser_22]

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@Joebatters wrote:

Ugh, the one year I hire a CPA they filed my 8606 incorrectly.

My 2018 8606 should've had an amount on Line 14.  I have entered my 2018 basis into my 2019 return and see the conversion is now not taxable.

Macuser_22, thank you for your patience, clear explanations, knowledge, and quick replies! 

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I agree with dmertz that yiu need to submit a corrected 8606 for 2018 and then enter the line 14 carry forward basis into 2019 to apply to the 2019 conversion when the interview asks for it.

[BTW - my commend addressed to dmertz is not for you and probably does not apply to your issue that would not have used that worksheet in 2018.]