Excess traditional IRA contribution in 2017 returned but not coded as P on 1099R due to mistake. How to show on 2018 return?

[Anonymous]

you need to contact the institution to get a corrected 1099-R.   if you put you P in, the IRS matching program will probably catch it and you will get a notice.

if the won't issue a corrected one contact the IRS at -1-800-829-1040.  they will send you form 4852.   since the filing deadline is in 2 days.,  you may need to use the one in TT.

here's what the IRS says you should have done

You should always attempt to get your Form W-2, Form W-2c, or
Form 1099-R from your employer or payer before contacting the
IRS or filing Form 4852. If you don’t receive the missing or
corrected form from your employer or payer by the end of February,
you may call the IRS at 800-829-1040 for assistance. You must
provide your name, address (including ZIP code), phone number,
social security number, and dates of employment. You must also
provide your employer’s or payer’s name, address (including ZIP
code), and phone number. The IRS will contact your employer or
payer and request the missing form. The IRS also will send you a
Form 4852. If you don’t receive the missing form in sufficient time to
file your income tax return timely, you may use the Form 4852 that
the IRS sent you.

[dmertz]

How was it coded on the 2018 Form 1099-R?

Was the corrective distribution was made by October 15, 2018?

[macuser_22]

For the financial institution to code a code "P" for a 2017 excess you must tell then them that the distribution is a "return of excess contribution" and not a normal distribution.  It must also have been done before the due date of the 2017 tax return (April 15, 2018) or extended due date if a timely extension was filed (Oct 15, 2018).

The only way a Traditional IRA contribution can be an excess is if you did not have sufficient taxable compensation for your filing status or exceeded the $5,500, or $6,500 if you’re age 50 or older contribution limits.

[jnpatla]

It came as regular distribution.  I did not show the contribution on 2017 taxes.  E-Trade advised after many phone calls that the excess distribution was cancelled since it was over $6500.   Earnings on it made it $7118.63 so they cancelled request.  When we requested the $6500 online from them it went to us as regular distribution.   I just had $6500 returned and not the $618.73.  Should I get this returned tomorrow and how do I show on taxes?  Do I need to amend 2017 taxes?  Help!!!

[jnpatla]

It was requested 4/12/19 but returned on 4/18/19

[macuser_22]

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@jnpatla wrote:

It was requested 4/12/19 but returned on 4/18/19

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Since the 2017 contribution was not returned until 2019 then it was after the Oct 15, 2018 cut off date to have a return or contribution and a code P.    A regular distribution code would be correct. 

You would owe a 6% penalty for 2017 on the amount of the excess.   It is unclear from your post as to just how much of, or all, your $6,500 contribution was in excess.   Only that amount in excess is subject to the 6% excess contribution penalty.    It was not necessary to remove the entire contribution if only part was in excess.

Because the excess contribution was not removed and you must pay the 6% penalty on an amended 2017 tax return, the earnings do not need to be removed.   The $6,500 2019 distribution will be taxable as an ordinary distribution on your 2019 tax return.    You should be receiving a 2019 1099-R in January of 2020 with a code 1 in box 7 if you are under 59 1/2 or code 7 if you are 59 1/2 or older.

[jnpatla]

I received the 1099-R for 2018 showing code 7 in box 7.  Also was told the entire $6500 was excess contribution which is was I requested however I later found out that it earned $618.73 and want to know how to handle this as I did not receive this amount.

[macuser_22]

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@jnpatla wrote:

I received the 1099-R for 2018 showing code 7 in box 7.  Also was told the entire $6500 was excess contribution which is was I requested however I later found out that it earned $618.73 and want to know how to handle this as I did not receive this amount.

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Please clarify.  You said in the post above that "It was requested 4/12/19 but returned on 4/18/19" - did you mean  4/18/18? - if removed in 2019 you would not have a 2018 1099-R.

[jnpatla]

Yes, sorry 

[macuser_22]

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@jnpatla wrote:

Yes, sorry 

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Then disregard  my post assuming that it was returned in 2019.

Your option is as user HOCKITOFF suggested filing a 4852 substitute 1099-R with code P and with an explanation of the reason you are using a substitute and the steps you took to get it corrected (The TurboTax interview for a substitute 1099-R will ask for those explanation statements).

As for the $619 earning still in the IRA that should have been returned with the contribution - that might be sticky.   If you simply remove it now, it will be another normal distribution that will be taxable and it is too late to have it returned as a return of contribution.   You "might" be able to get the IRS to waive the penalty for late removal but that could take months of letter writing.

@dmertz do you have any suggestions for the earnings?   Would it be possible to treat the earnings as a 2017 excess and just pay the 6% penalty on an amended 2017 return ($37) and just leave it in the IRA which would probably be cheaper in the  long run?

[dmertz]

The fact that only the $6,500 was distributed is problematic.  Presumably the account gained $618.73 (or $618.63, the comment mentioning the earnings mentions both possibilities, but the $0.10 difference is insignificant), or 9.5189%.  This means that, if treated as a return of contribution by submitting a substitute Form 1099-R (Form 4852), the $6,500 distributed represents a return of only $6,500 / 1.095189 = $5,935.05, accompanied by $564.95 of taxable gains.  That means that the account still contains $564.95 of excess contribution made for 2017, subject to 6% penalty for 2017, 6% penalty for 2018 and 6% penalty for each year going forward until corrected by a regular distribution of $564.95 (which would be a nontaxable distribution of excess contribution basis after the due date of the tax return).

[jnpatla]

Last April you mentioned that the simplest way to resolve this was to treat it an a return of excess contribution after the due date of the 2018 tax return and report on 2017 as excess and treat the distribution on 2018 return by entering a zero in box 2a on 1099-R form prompting Turbo Tax to treat the distribution as nontaxable,, to apply the distribution on Form 5329 to eliminate the excess carried in from 2017 and to ask for an explanation of the return of excess contribution after the due date of the 2017 tax return however we did not continue as to where to put the earnings.  Also after checking the initial investment a commission of $19.99 was charged so 6480.01 was actual amount.  Can you please elaborate on this solution.

[jnpatla]

As an afterthought even though commission was charged the 1099 shows $6500.  Also since I filed for extension, I can request the excess $618.73 be returned from the account today?

[macuser_22]

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@dmertz wrote:

The fact that only the $6,500 was distributed is problematic.  Presumably the account gained $618.73 (or $618.63, the comment mentioning the earnings mentions both possibilities, but the $0.10 difference is insignificant), or 9.5189%.  This means that, if treated as a return of contribution by submitting a substitute Form 1099-R (Form 4852), the $6,500 distributed represents a return of only $6,500 / 1.095189 = $5,935.05, accompanied by $564.95 of taxable gains.  That means that the account still contains $564.95 of excess contribution made for 2017, subject to 6% penalty for 2017, 6% penalty for 2018 and 6% penalty for each year going forward until corrected by a regular distribution of $564.95 (which would be a nontaxable distribution of excess contribution basis after the due date of the tax return).

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@dmertz - Are you suggesting a substitute 1099-R (4852) with $6,500 in box 1, $565 (rounded) in box 2a and code P in box 7 which would be entered on an amended 2017 tax return (as a 2018 1099-R) so that those earnings are taxable in 2017?

Then enter the remaining $565 (rounded) in the 2017 amended return as an excess on form 5329 and pay the 6% penalty?

Then for 2018 add the $565 again on a 5329 for another 6% penalty?

Finally before December 31 2019, remove the remaining $564.95 as a normal distribution so that another 2019 6% penalty will not apply for 2019.   In 2020 when the 2019 tax is done then enter that 1099-R distribution as non-taxable.?

That still leaves a problem that the IRS will receive a 2018 1099-R for a normal distribution form the IRA trustee that is being reported on a amended 2017 return with a code P instead.   That is sure to generate an IRS letter in about a year that will have to be explained.   (I guess a second substitute 1099-R with box 1 a zero and all else the same as the one received with an explanation of the situation might head off the IRS letters.)

Is my understanding of your suggestion correct?