Why does making Traditional IRA contributions for 2016 and 2017 and then doing Roth IRA conversion cause taxable income?

[Darkhog]

My 1099-R 

box 1 Gross Distribution - $11,000

Box 2a Taxable Amount - $11,000

Box 2b Taxable amount not determined - Checked.

5,500 of that is 2016,and 5,500 is 2017.  Is this 1099-R just wrong, or is there some way for me to mark half of this as 2016?  If I put $11,000 for 2017 donation it fixes the math but says I'll pay a penalty for excess contribution.

[DanO]

If the Traditional IRA amount was from contributions of pre-tax dollars, then the conversion to a Roth IRA which is made up of after tax dollars will be taxed at your normal income tax rate. The the distributions taken in later years will be tax free withdrawals.

If you find that your tax is going to be more than you can cover, then you could get in touch with your plan custodian and request a recharacterization of the full amount or partial amount.

[Darkhog]

Thanks Dan.  I should have mentioned that they are post-tax dollars.  I am not eligible for a deductible contribution.  It is my understanding that in this case, any growth would be taxed when converting to Roth.  But the growth would have been $0, so no tax.

[macuser_22]

If you reported a 2016 non-deductible contribution on your 2016 tax return you will have a 2016 8606 form with that carry-forward basis in line 14.

If you entered your 2017 non-deductible contribution in the IRA contribution section you would have a 2017 8606 form with the 2017 basis on line 1.   The total of line 1 & 2 will go on line 3.

If you properly entered the 1099-R and said yes to the question that asks is you made nondeductible  contributions and entered the 2016 8606 line 14 carry-forward basis and then entered the total 2017 year end value of all Traditional IRA accounts that existed, the the total basis on the 8606 line 3 will be applied to prorate the total basis between the distribution/conversion and 2017 year ens value.  If the year end value was zero then all of the basis would be applied to offset the tax.

[Darkhog]

Thanks.  This does in fact seem to be fixing the issue.  It seems that TurboTax, though it knew all of this information because I imported my 2016 TurboTax return, did not do the right thing.  I needed to explicitly say I had nondeductible contributions (TurboTax encourages you to say no) and add that basis.

@macuser_22 if you mark this as an answer rather than a comment I'll mark it as the answer.

[fanfare]

From import, TurboTax does not know how much non-deductible you put in this year. You have to tell it.
If you had no earnings on your IRA, what kind of an IRA is that ?

[macuser_22]

@Darkhog - If you had a 2016 carryover basis on the 2016 IRA Info Worksheet line 3 then if you transferred 2016 date into 2017 that should have carried to line 12 on the 2017 IRA info Worksheet.   I have seen a couple of other posters say that failed to happen.   If that happened then you either must enter it in the interview or manually enter it onto line 12 on the worksheet in the forms mode.