I took an early withdrawal from my Roth IRA (which I have owned for more than 5 years) for a first time home purchase. I took 40K out and am aware that the exclusion to not pay a penalty and taxes is only on my contributions and the10K first time home buyer exemption. My contributions into the Roth were about 17K. For some reason form 1040 line 4b "taxable amount" is on $23k ($40k distribution minus the $17k in contributions). It doesn't take into account the $10k first time home buyer exemption. It is my understanding that in an early distribution from a Roth IRA which is over 5 years old, no penalty or taxes apply to the contributions and no penalty or taxes apply to the $10K home exemption. This leaves me to be taxed and penalized only on the $13k remainder in earnings. Form 5329 does have the $13k amount listed for the 10% penalty, but why am I being taxed on the $23k amount instead of the 13k amount? I indicated that I have owned the IRA for more than 5 years when prompted.
I would also like to add that on form 8606, line 20 does not populate with the 10K first time home buyer number. This may have something to do with the taxable income not being reduced by the 10K and then flowing to the 1040. I'm not sure where I can enter this information. Form 1099R has a code of T for my situation, and now I'm wondering if the 1099-R is incorrect and has a code that does not register the first time home exemption?
I cannot recreate the issue, you might have to delete the 1099-R and reenter it. Answer all follow up questions carefully.
A code T in box 7 of 1099-R is for a Roth IRA distribution, when an exception applies. It is used for a distribution from a Roth IRA if the IRA custodian does not know if the 5-year holding period has been met but:
If this is not correct, then you might have to contact the issuer to correct this.
If you need additional help please see What is the TurboTax phone number?
Thank you for your help. I'm pretty certain the code of T does not apply as I took an early distribution for the first time home purchase (and am not 59 1/2 yet). I will be reaching out to the issuer to try and request a corrected 1099-R.
I'm having trouble with the $10,000 first time home purchase exception not showing up on form 8606, line 20. Where does this line item flow from? If it is not on line 20, then I get taxed on the 10,000 (even though it should be tax free).
Thank you.
I just want to add that the broker did not reissue me a new 1099-R leading me to create a substitute one. In addition, I've been on the phone with the IRS discussing the various codes that this withdrawal for the first time home purchase would need to be on the 1099-R and the best advice I've gotten is to do code "J," but regardless, the correct amounts should show up on form 8606. If that 10,000 exception does not flow through I will need to do a return by hand.
I'm having this same issue - I should not be paying tax on the $10k but turbotax is acting like I should. What ended up happening for you?
If you've held your Roth IRA for at least five years and you're older than age 59 1/2, the money you withdraw will be tax-free. If you open a Roth IRA account after you turn 59 1/2, you still have to wait at least five years before you can take distributions of your earnings without an early withdrawal penalty.
In your case, you still have to pay tax on the $10,000 home purchase exclusion (it is exempt from the 10% early withdrawal penalty only).
@ScottDIY
[Edited on 1/28/2022|12:42 PM,PST]
Sorry this is happening to you. After hours of trying to get turbotax to work, I went ahead and filed a paper return. I used many of the forms that were filled in from turbotax which helped a lot. I printed those out, but also printed out the remaining forms which related to this specific withdrawal, calculated the amounts and filled in the required numbers myself. In my case, I had to file a substitute form 1099-R to account for my broker's error in classification of type of withdrawal. I filled out form 5329 and form 4852 (the latter explains how you arrived at your numbers and what effort you made in trying to get a corrected 1099-R from your broker). Also form 8606 needs to check out. I made sure those numbers traced back to the main 1040 as all numbers in your return should obviously cross-reference. Don't hesitate to contact the IRS if you have any particular questions before you submit your return. For example, when I contacted them, they let me know that I was eligible for an additional $5k not to incur the 10% penalty because we had a baby that year and there was an Act passed called the Secure Act of 2019 that allowed for this. It's not the ideal answer you were probably hoping for with a simple click somewhere in Turbotax, but I hope this helps.
I disagree about having to pay taxes on this amount.
If the IRA is a Roth, withdrawals of up to $10,000 used to purchase a “first home” are completely free of tax and penalty (as long as the funds have been in the IRA for five years or more). In my case, the funds were there for more than 5 years and were used for a first time home purchase. No taxes should be paid on the $10K amount.
Perhaps you misunderstood my situation. There is a bug with the Turbotax software.
I meet all qualifications for the $10k tax-free first time homebuyer purchase. TurboTax even asks me for that information and I fill it out correctly. But the data is not saving correctly, and Form 8606 Line 20 is not putting the $10,000 there. This is resulting in my taxes being calculated incorrectly.
This should be escalated to TurboTax's engineers, but I have no idea how to get in touch with them.
I think I did understand correctly. What you are describing happened to me as well. Turbotax was unable to help me on here and I had no luck getting in touch with them, so I took matters into my own hands and filled out form 8606 on my own in addition to other forms I mentioned in my previous reply to incorporate the $10k I should not be paying taxes on and made sure that number and all related calculations was then reflected on a 1040 which I also filled out on my own. I was able to use the other forms like schedule C, which don't calculate anything related to the IRA distribution straight out of Turbotax. Then combined the forms that Turbotax got right and the forms that I did on my own due to the glitch with the IRA distribution. I'm sorry, I know it's frustrating and I hope they get it right soon.
Also, to be clear, after I combined my forms with those from Turbotax, I had to send in the return by mail 😕
You understood me, but the "Turbotax Expert" that replied did not 🙂 Sorry to hear you went through so much effort to file... I might just go to an accountant if they don't fix the bug soon.
Got it. Yes, calling Turbotax about this got me talking to a regular customer representative. I didn't have the energy to escalate it and try to go up the ranks because I was already dealing with trying to get this return done accurately and had a tax deadline.
This bug was introduced with the initial release of 2020 TurboTax. It appears that the only way around this bug with TurboTax is to use the CD/download version of TurboTax and override line 20 of Form 8606 so that you can enter the $10,000 directly on line 20. With the override, you have to print and mail your tax return.
I got in touch with the "VP of Product" who claimed there is no bug and things are being calculated correctly. Really disappointing, but this does not look like it'll get fixed.
Big warning to anyone who bought a home using their Roth IRA distribution: DO NOT use TurboTax!
Further investigation has shown that this bug is only present in the CD/download version of TurboTax. The online version of TurboTax handles this properly. I believe that one of the TurboTax Employee Tax Experts is reporting this problem to TurboTax Product Quality.
It's so sad how easy it is to replicate this bug and yet it's still not solved even in the latest update.
It's clear something is wrong with this text field. Press the enter key after you input the amount and it disappears. Everywhere else in Turbotax, pressing enter after typing in the amount formats it to $xxxx.xx.
Clearly there is an issue with this input field so it's not storing to the database.
The CD/Download version still doesn't account for this properly. The online version does.
I'll work on getting a refund for the CD/Download version.
Is anyone having any luck getting this resolved?
I can confirm that that values are not being saved if you press enter. This happens on other questions as well.
I just spent time with a Turbotax rep who insisted that on the question that was shown in the screen shot above (how much of the withdrawl was used to purchase a home), that I can only enter $10,000 and no more and that is why it doesn't work. My frustration got the better of me and I ended the call.
This seems to be common error, well documented here by multiple users, and was supposedly reported. I keep hoping it gets corrected with an update, but running out of time. Grrrr.
The resolution is to use the online version and get a refund for the desktop version. The desktop version has many errors that caused my taxes to be off by $5K and my partner's taxes by $3K.
My desktop version was free from Fidelity. I guess you get what you pay for.
Could have gotten the online version but I do my kids taxes too and online only gives you one return.
Really don't want to go through all the data entry again. Or use the override and file by mail. I don't think I am being unreasonable in expecting Turbo Tax to correct the error in the desktop version.
This makes me question the accuracy of the other calculations as well, so I may go back to using Tax Act after this year.
Definitely not an unreasonable request. But I even was able to get in contact with the Head of Product at TurboTax and he said I was wrong.
So good luck making any headway with this.
I had another call yesterday with the support folks to discuss the problem with the Windows download version. My call got bumped up the ladder and was more productive than my first attempt. The most obvious problem was on the question where they ask if any of the Roth IRA distribution was used for a first time home purchase, and if yes, how much was used for that purpose.
My answers to these questions were not being saved. The support people were able to view my screen and see that the dollar entry was wiped out whenever I pressed enter. Saving the return before pressing enter or moving to the NEXT screen did not solve the problem. I also realized that there was no note about limiting the amount to be entered to $10,000, although that wording does appear on the online version.
The amount to be entered on the step by step screen asking if proceeds were used to purchase a first home was supposed to be transferred to Form 1099-R, immediately below the regular data reported by the payer. We went to that Form to see if we could enter the dollar amount there. The same problem occurred with that field; if you enter a number it disappears as soon as you press enter.
I also noticed that there was a check box just above the space for the dollar amount, to indicate if the distribution was a "qualified distribution". The IRS instructions specify that a distribution made after the 5-year period which meets the requirements under the First Time Homebuyers exception is a Qualified Distribution. In my case, the box was not checked, even though I had entered the date a Roth IRA was established and had answered yes to the question on the step by step asking if proceeds were for a first time home purchase.
I checked that box, and to my surprise, the tax due amount was reduced to properly reflect the tax free status of the Roth IRA distribution. This occurred even though the dollar amount on the line below was still blank! We then ran the edit checks to see if manually adding the check in the box indicating a Qualified Distribution would flag the manual entry as an "override" which prevents the electronic filing. The override error did not occur.
I have not done the electronic filing yet, but it appears this solves my problem. If you take a Roth distribution where only a portion of it was used for the first time home purchase, I think it would give the entire distribution favorable treatment (up to the $10,000 maximum on investment earnings), so it may not give the correct result in every case. But it worked for me!
The support folks agreed that the program contained an error and needed to be fixed. I have no idea if/when the fix will be made. But hope this helps others get around the problem.
Edited to add: Yes, Dmertz is correct about Form 8606 being missing from the filing. I suspected that, but if TurboTax does not correct this problem by the filing date, I will file it anyway. And then respond to the IRS if/when they come knocking. There is no question this is a TurboTax error, and the support person I spoke with agreed it needed to be fixed. Still hopeful they will do it quickly, but my backup plan is to file electronically. I just don't trust the USPS anymore.