Excell Contribution to Roth IRA.

[sfowjr66]

In 2021 my only income was from a  federal grant and from investments. My income was reported on 1099-G and the usual 1099-Int and 1099-Div.  I had no wages, no salary.  Being uniformed, I made an after-tax contribution to my traditional IRA, then did "back door" conversion to my Roth IRA.  Now I learn that with no 1040 line 1 earnings, this IRA contribution is not allowed.  How do I remove the excess contribution made to the IRA and converted to the Roth IRA? Thank you.

[Opus 17]

You must have compensation to make IRA contributions.  Compensation is generally income earned from working, and is defined here.

https://www.irs.gov/publications/p590a

After passage of the SECURE act, some grants and stipends are considered "compensation" for purposes of making IRA contributions even though they are not "earned income" for other purposes.  

"Graduate or postdoctoral study.

Compensation includes any income paid to you to aid you in the pursuit of graduate or postdoctoral study."

If this is the kind of grant you got, you need to delete the 1099-G and enter the grant in the interview section for educational expenses.  You don't have a 1098-T, but keep going and the program will ask about taxable grants and fellowships.  (Another place it might work is if you enter it on the 1099-MISC screen and check the box for "this was a graduate fellowship" on the page of special situations.  This used to work, but I don't know if it is still there.)

If you did not get a grant or stipend for graduate or postgraduate study, then you don't have compensation and your IRA contribution is considered excess.  I don't know how to remove it at this point,

@macuser_22 

@dmertz 

[macuser_22]

That would be a disallowed Roth conversion with the excess now in the Roth.   I doubt that the IRA custodian will undo the conversion (but you should ask them) and do a 'Return of contribution" and any earnings attributed to the excess.  

If they will not undo it then you should take a distribution from the Roth equal to the contribution and any earnings before filing date (or extended filing date if an extension is filed) then the contribution amount will offset the amount of contribution but the earnings will be taxable plus a 10% excise tax if you are younger then age 59 1/2.

[sfowjr66]

Thanks. I have learned that the IRS has given consideration to treating postdoc fellowship stipend as income rather than as a grant. As income one can contribute to IRA; as grant one cannot.  I am going to try to get rid of the amount reported as grant on the 1099G and instead report the income as income on line 1 of 1040. The problem is that the IRS will receive the 1099G but will not receive a W2 for the earnings. In both cases the income/grant money is taxable so they should not care.

I don't think I am allowed to prepare a W2 form to show the earnings from th  payer which is a research institute where I am a post doc fellow receiving an annual government grant as my only income.

Do you have thoughts about this?  Thank you for your ideas. 

[ErnieS0]

Do not enter a Form W-2 into TurboTax if you did not receive a W-2.

The Secure Act of 2019 did change the law to treat fellowship income as compensation:

“The term ‘compensation’ shall include any amount which is included in the individual’s gross income and paid to the individual to aid the individual in the pursuit of graduate or postdoctoral study.”

Enter the amount as Other income not already reported on a Form W-2 or Form 1099.

1. Tap Federal in the left column
2. Then Wages & Income at the top
3. Go to Less Common Income
4. Start Miscellaneous Income, 1099-Am, 1099-C
5. Start Other income not already reports on a Form W-2 or Form 1099
6. Say Yes to Other Wages Received
7. Say Yes on Any Other Earned Income
8. Tap Other on Enter Source of Other Earned Income
9. Enter a Description and Amount on Any Other Earned Income

[sfowjr66]

Thank you for your good and helpful suggestions.  I have followed your suggestions. But what happens to the 1099G which I have received from the institution where I am a post doc fellow and which has been sent by my employer to the IRS?  Turbo Tax asks me if I have received a 1099G. The answer would be "yes" but then I am not going to report the stipend amount that appears on the 1099G.  So how do I handle this? Won't the IRS look for the income reported in the 1099G since they will get a copy sent to them?

Also in doing this in the manner you suggested, I have free-texted a description of the income and my intent to report as income on line 1.  But that form comes up as "only for your records" rather than on a form that will be sent to IRS if I electronically file (which would be my intent).  Instead should I print and mail my return so I can send a supporting statement about how I have moved the income reported on the 1099G to line 1 of the 1040?

Thanks again.

\

[ErnieS0]

The IRS will be able to match the amount reported on 1099-G with the amount in other income.

You can add "1099-G" to your description. For example "1099-G fellowship income".

[nsbm]

I have the same issue as OP (income was taxable grant reported by 1099-g), but when I follow @ErnieS0 steps, it tells me not to put amounts greater than $2300 per employer. Otherwise, you need to request a W-2 which my institution will not give me as a post-doc.

[Opus 17]

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@nsbm wrote:

I have the same issue as OP (income was taxable grant reported by 1099-g), but when I follow @ErnieS0 steps, it tells me not to put amounts greater than $2300 per employer. Otherwise, you need to request a W-2 which my institution will not give me as a post-doc.

---

I don't believe that is the best answer.

@Hal_Al  comments?

I believe the better way to enter a graduate stipend is through the education deduction interview.  (Yes, deductions.)  You indicate you don't have a 1098-T, you don't have other tuition payments, and keep going, and eventually it will ask you if you have taxable stipends or fellowships.  I believe that if you enter the stipend in this location, it will be recognized as compensation for IRA purposes.  It's possible that if you enter a stipend, and don't enter the 1099 as a 1099, the IRS will send a letter asking for the the 1099, but you would reply by pointing out that you did report the income in the correct place.

(As best I can recall, regardless of what kind of 1099 the payor issues, your stipend should be reported on line 1 with "SCH" next to it, instead of on schedule 1 or someplace else.)

[Hal_Al]

Either way puts it on line 1 of form 1040, where TT will treat it as earned income, for IRA contributions.  If you worked for a college or non profit  instead of a company, or it's a government grant, the income could be entered as taxable scholarship. Enter it in the educational expenses section, rather than the income section of TurboTax.  This still puts it on line 1 of form 1040, but with the "SCH" code.

Alternatively , enter at: (this is the same as ErnieS0's method):

Federal Taxes Tab

-Wages and income

Scroll down to:

--less common income

---Misc Income, 1099-A, 1099-C..... (Press start)

-----Select START (or update) to the 1st choice  titled "Other Income not reported on a W-2....." and Continue

-------Select YES to other wages received  and Continue

----------Select CONTINUE on the "Wages earned as a Household Employee" screen (enter nothing here)

--------------Select CONTINUE on the "Sick or Disability Pay" screen (enter nothing here)

-----------------Select "Yes" on the "Any Other Earned Income" screen and continue

----------------------Select "Other" on the "Enter Source of Other Earned Income" and Continue

--------------------------In Description Box type "Stipend" and the amount. Click Done.

That puts the income on line 1 of form 1040, where it is treated as earned income., but without a code to identify it

Note: income on line 1 of form 1040 without a W-2 or line 1 code is a small red flag at the IRS, but easily explained if the IRS contacts you.