Why do I owe more tax for 2016 if I contributed to a traditional IRA from January thru April 18 2017?

[scott18]

I'm 58 years old, and I'm considering contributing $6500 to a traditional IRA before April 18, 2017.  When I enter $6500 in the 2016 contribution amount in Turbo Tax Premier, it doesn't change my tax liability, but it also asks me how much of that contribution was made from Jan 1-April 18, 2017, when I enter $6500 in the 2017 date field it increases my taxes due for 2016. If I'm able to contribute $6500 before April 18, 2017 why does it penalize me for when I make the contribution in 2017?

[dmertz · Accepted solution]

Basis from a nondeductible traditional IRA contribution for 2016 made in 2017 is not available to be applied in determining the taxable amount of a distribution made in 2016.  It is only available to be applied in calculating the taxable portion of distributions made in 2017 and beyond.

See Form 8606 Part I.

[scott18]

I don't understand your answer.  Can you please try to explain using different verbiage.  My question is why does my tax liability increase when I enter the $6500 IRA contribution actually made in calendar 2017 vs 2016 using Turbo Tax solftware?

[dmertz]

See the calculations on Form 8606.  Traditional IRA contributions that you make that are nondeductible create after-tax basis in your traditional IRAs.  The net basis that you had contributed to your traditional IRAs by year-end is used in combination with your total year-end balance in traditional IRAs and the amounts of any traditional IRA distributions or Roth conversions to determine what amount of your basis is applies to those traditional IRA distributions or Roth conversions to make that portion of the distribution or conversion nontaxable.  By indicating that you made a nondeductible contribution for 2016 after year-end, that contribution does not add to your year-end basis.

Initially TurboTax assumes that your nondeductible contribution was made in 2016 and can be included in determining the taxable amount of your 2016 distributions and conversion.  Once you tell TurboTax that the contribution was made in 2017 instead, TurboTax adjusts the calculations on Form 8606 to reduce the proportion of basis to balance, reducing the amount of the distribution that is nontaxable, increasing the amount of tax liability that results from the distribution or conversion.  Whatever amount of basis was not able to be used against your 2016 distributions and conversions carries forward to be applied to future traditional IRA distributions and Roth conversions.  (Note that distributions and conversions are reportable on the tax return for the year *in* which the distribution or conversion occurs.)

If you make an eligible nondeductible traditional IRA contribution for 2016 in 2017, your tax liability for 2016 will be the same as if you had made no such contribution.

[dmertz]

Also see IRS Pub 590-B, Figuring the Nontaxable and Taxable Amounts:
<a rel="nofollow" target="_blank" href="https://www.irs.gov/publications/p590b/ch01.html#en_US_2016_publink1000230818">https://www.irs.gov/p...>