2015 Roth IRA recharacterized to Traditional in 2016 before tax filing (excess contributions after getting married) then converted back to Roth. Turbotax says i owe taxes

[Anonymous]

I contributed $5500 to Roth in 2015, got married in December and because of the combined income, i was no longer eligible for Roth contributions. Vanguard suggested to recharacterize this contribution into Traditional and convert it back to Roth. This happened before tax filing in 2016 and 2015 Tax Form 8086 captures this correctly.

I also contributed $5500 to Traditional for the year 2016 and converted it to Roth (backdoor-ing).

I received a 1099-R for 2016 with $11,000

box 1: $11000

box 2a: $11000

box 2b: X (Tax amount not determined, Total Taxable both checked)

Box 7 (Distribution): Code 2

IRA/Simple/SEP/: Checked

In turbotax, i entered $5500 was contributed to Traditional for the year 2016 and was converted to Roth. This amount isn't taxed but the other $5500 (of the $11,000) is taxed at ~$2000.

How do i handle this situation in turbotax such that the remaining amount isn't taxed?

[macuser_22 · Accepted solution]

Here is the entire procedure:

This so-called “back-door Roth” method ONLY works if you have NO OTHER Traditional IRA accounts.  If you do, then the non-deductible part must be spread over ALL accounts and cannot be withdrawn by itself.  Only if you started with NO Traditional IRA and ended up with a zero amount in ALL Traditional IRA accounts will this Roth conversion not be taxable.

First you must enter your Traditional IRA contributions (if there were 2016 contributions).

IRA contribution
Federal Taxes,
Deductions & Credits,
I’ll choose what I work on (if that screen comes up),,
Retirement & Investments,
Traditional & Roth IRA contribution.

Be SURE to answer the follow up that the are choosing to make this contribution NON-DEDUCTIBLE - if that screen comes up. (DO NOT say that you moved (recharacterized) the money to a Roth) – this is a conversion, not a recharactorazition.

Then enter the 1099-R that shows the distribution.

Federal Taxes,
Wages & Income
I’ll choose what I work on (if that screen comes up),,
Retirement Plans & Social Security,
IRA, 401(k), Pension Plan Withdrawals (1099-R).

Answer the follow-up questions answer the question that you moved the money to another retirement. The screen will open up with choices of where it was moved. Choose you converted it to Roth IRA.

When asked if you have made any non-deductible contributions say " "yes" if you did then enter the non-deductible contributions made for tax years before 2016.     (Usually zero unless you also made a 2015 or earlier non-deductible contribution).

Enter the 2016 year end value of your Traditional IRA a "0" (zero) - if it is in fact zero - this tax free Roth conversion will not work if it is not zero.

[If you had any other Traditional IRA at the end of 2016, then the nondeductible "basis" must be pro-rated over the current distribution and the total IRA value and only a portion of the Roth conversion will be non taxable and part will be taxable, with the remaining non-deductible basis carrying forward for future distributions. You can never only withdrew the nondeductible basis as long as the IRA exists and has a value more than zero.]

The non-deductible amount of your contribution will be subtracted from the taxable amount of the conversion on then 8606 form and enter on line 15a of them 1040 form and a zero taxable amount on line 15b  if you did it right.

Also see this website that has some screenshots of the procedure
http://thefinancebuff.com/how-to-report-backdoor-roth-in-turbotax.html

[macuser_22]

The 2016 contribution should be entered in the IRA contribution section and marked non-deductible (if it is not automatically nondeductible because of high income).   That should account for the 2016 contribution.

The 1099-R interview (after the 1099-R entries screen) will ask of you tracked your non-deductible contributions - says yes, then enter the 2015 contribution.    Then the total value of all existing Traditional, SEP or SIMPLE IRA accounts at the end of 2016 which if not zero the conversion will be partly taxable since the nondeductible basis must be pro-rated over the conversion and year end value.

[Anonymous]

Thanks for your response @macuser_22.

I think i am doing what you said, it doesn't change the taxes owed. Let me give you some more details on what i have entered:

Wages & Income > 1099-R Enteries:
 - 1099-R enteries as mentioned in the post > Tracked non-deductible contributions to IRA > IRA basis on 31st Dec 2015 as $5500 > Value of Traditional/SEP/SIMPLE on 31st Dec 2016 as $0

Under Deductions & Credits > Traditional & Roth IRA:
 - select traditional IRA contributions > $5500 Contributions for 2016 > $5500 recharacterize to Roth > Track non deductible contributions > IRA basis on 31st Dec 2015 as $5500

Is this different from what you are suggesting?

[macuser_22]

"...select traditional IRA contributions > $5500 Contributions for 2016 > $5500 recharacterize to Roth..."  No.

You did not recharacterize the 2016 contribution, you *converted* it to a Roth with the 1099-R interview.

Go back to the IRA contribution section and just make it a non-deductible contribution as I said above.  That will add it to line 1 of the 8606 form and the 2015 contribution should be on line 2 with the total of both on line 3.

[Anonymous]

@macuser_22 thanks for the detailed response, changing the recharacterized amount to $0 totally fixes the tax owed situation.

I also printed the tax forms to see the 8606, it looks exactly like what you suggested.

One thing though is that i don't see an explanation being asked anymore about the conversion, i guess its normal.

[macuser_22]

There is no explanation for a conversion - only a recharacterization.  When you got rid of the recharacterization  the explanation request went away.    (For some reason it comes up in the 1099-R interview if it was created in the contribution interview.)

[Anonymous]

I have been trying to be done with taxes for a while now, thank you again, i will be finally done with it.

I think the whole problem was in my lack of understanding of conversion vs. recharacterization and inability to form a good search query.