1099-R not showing taxable gain for Roth Conversion

[turtle919]

My wife contributed post tax (non-deductible) money to an IRA back in 2008, and we logged the basis for that with form 8606.  In 2021, we finally converted that IRA (original amount + market gain) to a Roth IRA.  

The original IRA from 2008 was through Fidelity, but the Roth conversion happened with our advisor from a different company.  A 1099-R was generated by our advisor's company, but it is not correctly reflecting the market gains associated with this conversion as taxable income.  When I work through the TurboTax interview, it is consistently showing the full converted amount as tax free, when I'm fairly certain the market gain from the original IRA should be taxed as income.   TurboTax seems to be arriving at this decision based on data entered in the 1099-R box 7.

Is there a way to account for the market gains from that IRA without modifying the 1099-R from our advisor?  I believe I owe tax on the gross distribution on the 1099-R minus the cost basis for the original IRA.

[AnnetteB6]

Make sure that the basis in the Traditional IRA has been entered.  You will either see a question about this after you have entered the Form 1099-R reporting the distribution, or you can go to the IRA contribution section to enter that information.

Use these steps to get to the section where you can enter the basis:

• On the top row of the TurboTax online screen, click on Search (or for CD/downloaded TurboTax locate the search box in the upper right corner)
• This opens a box where you can type in “Traditional IRA” (be sure to enter exactly as shown here) and click the magnifying glass (or for CD/downloaded TurboTax, click Find)
• The search results will give you an option to “Jump to Traditional IRA”
• Click on the blue “Jump to Traditional IRA” link

[fanfare]

" I believe I owe tax on the gross distribution on the 1099-R minus the cost basis for the original IRA."

You have to file Form 8606 to make this happen.

Somewhere along the process TurboTax should ask did you ever make non-deductible contributions.

[turtle919]

Thanks @AnnetteB6 and @fanfare for the suggestions.  I now see a little more clearly how the interview questions are split between the income and deduction sections.  

I did leave some detail out that might be complicating things even more for myself.

-->  Original IRA funded in 2008 with X amount of non-deductible (post tax) contributions.

-->  In 2021, that original IRA (X = amount above + Y = amount in market gain) was rolled to another IRA with my advisor.

-->  Also in 2021, my advisor converted the full value of the original IRA (X + Y) along with another 6K of non-deductible contributions for the 2021 tax year to a roth IRA.  The 1099-R supplied by my advisor shows the full value (X+Y+6K) as the gross distribution, and it marks this as taxable.  Though the taxable amount not determined box is checked, box 7 shows a code 2 for distribution, and the IRA/SEP/Simple box is checked.

In my simple understanding, I should rightfully owe tax on everything in the distribution that was not a non-deductible contribution (i.e. market gain).  However when I run through the interview questions, TurboTax seems to keep coming up with oddball numbers as the taxable portion.  Looking into the forms deeper, it looks like it's doing a calculation to only allow a portion of the non-deductible contributions (basis) to be counted as non-taxable for the distribution covered in the 1099-R.

To me, it seems like I'm getting double taxed on those non-deductible contributions.  I'm not sure if this is because of the timelines involved, or if it's due to being over the MAGI limit.  I tried tinkering with the forms directly to see if I could make the numbers work the way I thought they should, but quickly got in over my head.

[fanfare]

"I should rightfully owe tax on everything in the distribution that was not a non-deductible contribution (i.e. market gain). "

"6K of non-deductible contributions for the 2021 tax year to a roth IRA. "

That doesn't count and that's why your calculation is different from Form 8606.

[turtle919]

I think I got my terminology mixed up somewhat.  The 6K was contributed to a traditional IRA with my advisor, which was combined with the (X+Y) amount from the other IRA rollover.  That advisor's traditional IRA was then  fully converted to a backdoor Roth.  I have 5498 forms tracking the 6K contribution and the distribution from the full Roth IRA conversion.  Also have the 8606 form from 2008 tracking the basis (X) for the original IRA.  I assumed an 8606 for the 6K would be generated for 2021 tax year.

Not sure why the 6K wouldn't count as non-taxable in that scenario.  Everything that was converted to the backdoor Roth was post tax money aside from the market gains the first traditional IRA made over those 13 years.  From what I understand, that tax liability would be calculated at the time of the Roth IRA conversion.  

[dmertz]

Any distribution from a retirement plan is classified as income whether taxable or not.  Being classified as income just means that it needs to be shown on your tax return.  Nontaxable amounts will be included on Form 1040 line 4a or 5a depending on the type of retirement account (4a in this case since the distribution was from an IRA) but excluded from the taxable amount on line 4b or 5b.  Only taxable amounts affect anything else on your tax return.

Be sure to click the Continue button on the page that lists the Forms 1099-R that you've entered and, when asked, enter your basis in nondeductible traditional IRA contributions from line 14 of your 2008 Form 8606.  (I assume that there were no intervening nondeductible traditional IRA contributions or traditional IRA distributions that would have required a Form 8606 that would have a more up-to-date basis value that you should use instead.)