We believe we found a calculation error in the TurboTax 2020 calculation in a situation where non-deductible contributions to traditional IRAs for 2020 are made between January 1, 2021 and April 15, 2021. In the TurboTax "Tax IRA Dist" worksheet, the calculation in line 8 divides line 3 by line 7. However, in the Form 8606, the amount entered in the equivalent of line 3 SUBTRACTS first the non-deductible contributions to traditional IRAs for 2020 made between January 1, 2021 and April 15, 2021. In the Turbotax worksheet, line 3 is using the amount before subtracting back out the amount contributed in 2021. I attach a sample calculation in the picture attached using the TurboTax worksheet and using the Form 8606.
I value your thoughts community! Thanks
@69VanNuys wrote:
Thank you for confirming the error. I believe you are correct that the software is using Table 1-1, which works only if Line 4 of Form 8606 is ZERO. That is, if no contribution was made between January 1, 2021 and April 15, 2021. Turbo tax is not running the calculation through the entire Form 8606 calculation and it results in a calculation error.
As user @dmertz pointed out - there is no error. TurboTax is using the IRS worksheet 1-1 on Pub 590.B.
You will find the TurboTax calculations on the "Taxable IRA Distribution Worksheet" in TurboTax.
That IRS worksheet says to enter ALL contributions, including any made for the prior year before the due date and add them together which is what TurboTax does.
We agree that the IRS worksheet seems to conflict with the 8606 instructions and will include the prior years contribution in the calculations which results in a lower tax then the 8606 calculations do, but that is what the IRS says to do and it seem that most tax software have started to use the worksheet instead of then 8606 because of the better tax treatment.
TurboTax is apparently using Worksheet 1-1 from IRS Pub 590-B to calculate the nontaxable and taxable amounts of this Roth conversion rather than doing the entire calculation on Form 8606, indicated by asterisks on lines 13, 15 and 18.
https://www.irs.gov/publications/p590b#en_US_2019_publink1000270091
Thank you. Does anyone know how to report this to TurboTax to get or fixed?
Thank you for confirming the error. I believe you are correct that the software is using Table 1-1, which works only if Line 4 of Form 8606 is ZERO. That is, if no contribution was made between January 1, 2021 and April 15, 2021. Turbo tax is not running the calculation through the entire Form 8606 calculation and it results in a calculation error.
@69VanNuys wrote:
Thank you for confirming the error. I believe you are correct that the software is using Table 1-1, which works only if Line 4 of Form 8606 is ZERO. That is, if no contribution was made between January 1, 2021 and April 15, 2021. Turbo tax is not running the calculation through the entire Form 8606 calculation and it results in a calculation error.
As user @dmertz pointed out - there is no error. TurboTax is using the IRS worksheet 1-1 on Pub 590.B.
You will find the TurboTax calculations on the "Taxable IRA Distribution Worksheet" in TurboTax.
That IRS worksheet says to enter ALL contributions, including any made for the prior year before the due date and add them together which is what TurboTax does.
We agree that the IRS worksheet seems to conflict with the 8606 instructions and will include the prior years contribution in the calculations which results in a lower tax then the 8606 calculations do, but that is what the IRS says to do and it seem that most tax software have started to use the worksheet instead of then 8606 because of the better tax treatment.
@dmertz - I am starting think that @69VanNuys is correct and something has been overlooked in the IRS 590-B instructions.
What do you think?
Follow this --- assume
$6,000 2019 contribution.
$6,000 2020 contribution made in Feb 2021 *for* 2020.
2020 1099-R $12,000 converted to Roth
=====
This produces a
8606 line 1 = $6,000 (2020 contribution)
8606 line 2 = $6,000 (2019 contribution)
8606 line 3 - $12,000 (line 1+2)
8606 line 4 = $6,000 (contribution made in 2021 for 2020)
8606 line 5 = $6,000 (line 3 - line 4)
TurboTax uses the IRS worksheet 1-1
The worksheet uses the total of the $12,000 contributions to arrive at the non-taxable amount of $12,000 on line 8 of the IRS worksheet that is line 11 on the TurboTax version.
But note: the IRS pub 590 prior to the worksheet 1-1 (under Contribution and distribution in the same year) says when to use the worksheet and step #4 says:
4. if line 5 of Form 8606 is less than line 8 of Worksheet 1-1, complete lines 6 through 15c of Form 8606 and stop here.
Well, as I read it, line 5 of the 8606 is $6,000 and line 8 (TurboTax line 11) is $12,000 so the worksheet should NOT be completed and the remainder of the calculations should be done on the 8606 lines 6-15c.
Am I reading that right and TurboTax is doing it wrong or am I missing something ??
Thanks for thinking about it and keeping the dialogue open. Will be interesting to hear what the community thinks about how to resolve this situation.
User dmertz is the community expert on this subject. If he agrees that TurboTax has been doing it wrong for the last 2 years, I will put in a bug report with the moderators.
My position is that TurboTax is excessively 'liberal' in its use of Worksheet 1-1. I don't think that TurboTax should be using the worksheet if the contribution would be nondeductible even without the added income of the taxable portion of the distribution, for example, or if the individual explicitly chooses the contribution to be nondeductible. In either of those cases the entire amount of the traditional IRA contribution ends up on Form 8606 line 1.
I no longer pursue this issue since (almost) nobody complains about being able to apply a greater amount of basis by TurboTax using Worksheet 1-1. Apparently a few people have been questioned about it by the IRS and they've just needed to provide a copy of the completed worksheet in response. I've heard that there is at least one other tax software that somehow includes this worksheet in the forms needed for filing when this worksheet is used.
What about the rule I pointed out that says the 8606 shoud be used and not the worksheet. Seems like TT is ignoring that rule.
I think that TurboTax is following that rule. In my test of this, TurboTax prepares the worksheet as required and then fully prepares Form 8606 instead of transferring amounts to Form 8606 from the worksheet.
The trouble is that in my actual return, Turbo Tax is not following form 8606. It is following the Table 1-1. Turbo Tax does NOT go through the steps in 8606 and ends up with a different number on the taxable and non-taxable lines. TT is following the table. Form 8606, as I described in my photos above, subtracts from the amount contributed in 2021.
@69VanNuys wrote:
The trouble is that in my actual return, Turbo Tax is not following form 8606. It is following the Table 1-1. Turbo Tax does NOT go through the steps in 8606 and ends up with a different number on the taxable and non-taxable lines. TT is following the table. Form 8606, as I described in my photos above, subtracts from the amount contributed in 2021.
Yes - that is what we are discussing. TurboTax (and other software companies) are using the IRS worksheet because it is more favorable to the taxpayer and allows contributions *for* the tax yer but made after the tax year to be counted.
Note that that worksheet should be used if the reason for the non-deductible contribution is because of being covered by a retirement plan at work and the deduction is phased out or eliminated. It is not clear if that is what the IRS intended, but I have not heard of ANYONE being audited because of using that worksheet.
Thank you for your time and comprehensive responses. Following this rationale of using Table 1-1, there is still an uncertainty. I will explain in detail so that you can re-create it on your end using TurboTax.
Senario:
Under 65 using BackDoor Roth annually. Contributions to Traditional IRA and Conversion to Roth for the tax year are made between January 1 and April 15 of the following year. There is an existing Traditional IRA balance.
2020: $6,000 contributed to Traditional IRA (for tax year 2019). $6,000 converted to Roth (for tax year 2019). Both of these transactions occur in February of 2020.
2021: $6,000 contributed to Traditional IRA (for tax year 2020). $6,000 converted to Roth (for tax year 2020). Both of these transactions occur in February of 2021.
Question:
Table 1-1 Line 2 states:
Enter the total of all contributions made to your traditional IRAs during 2019 and all contributions made during 2020 that were for 2019, whether or not deductible. Don't include rollover contributions properly rolled over into IRAs. Also, don't include certain returned contributions described in the instructions for line 7, Part I, of Form 8606
The Table 1-1 example above was published in 2019, so assume all references to 2019 are 2020 and 2020 are 2021.
In this scenario example, should line 2 be $6,000 or $12,000? I assume the "that were for 2020" language is intended to qualify both (1) the 2020 contributions and (2) the contributions made during 2021. Which means it would only be $6,000.
Thoughts?
There is no converting to a Roth IRA for a tax year, conversion occur in a particular tax year. There is no way that a contribution for 2020 made in 2021 or a contribution for 2021 can be converted in 2020 because neither amount was in a traditional IRA in 2020. The conversion of these amounts in 2021 are a 2021 Roth conversion.
69VanNuys, TurboTax Product Quality and development folks have in the past asserted that the use for the worksheet as you are seeing it being used is correct, which is why I've generally moved on from this issue.
@madhavvi wrote:
Is there any update to this issue?
No. Because it is not an issue. It follows the published IRS worksheets.
Is there a possibility of TurboTax including worksheet in tax return to avoid IRS questions given this may result in a more favorable tax treatment for non deductible contributions as part of a Roth back door conversion than instructions on form 8606?
In my case taxable part of conversion is $0 following worksheet but is approx $100 (due to $103 balance in a SEP IRA at end of 2020) if I followed instructions on form 8606.
@madhavvi wrote:
Is there a possibility of TurboTax including worksheet in tax return to avoid IRS questions given this may result in a more favorable tax treatment for non deductible contributions as part of a Roth back door conversion than instructions on form 8606?
In my case taxable part of conversion is $0 following worksheet but is approx $100 (due to $103 balance in a SEP IRA at end of 2020) if I followed instructions on form 8606.
That is the reason that most tax software providers are using the worksheet now.
The worksheet is there if you print all form and worksheets or use the forms mode with the desktop version.
It is not included as part of the tax return because the IRS has not made it a form and there are no e-file specifications (schemas) for it. TurboTax cannot submit anything to the IRS that the IRS e-file computer is not programed to accept. If you mail file you can print it and attach it to your paper return.
@madhavvi wrote:
Is there a possibility of TurboTax including worksheet in tax return to avoid IRS questions given this may result in a more favorable tax treatment for non deductible contributions as part of a Roth back door conversion than instructions on form 8606?
I had a hard time wrapping my feeble brain around this also - how could a contribution made in 2021 for 2020 apply to a 2020 conversion? - did not make sense.
But it has been pointed out to me that the actual law that Congress wrote that allows prior years contributions to be made up to the due date of the prior years tax return states that the contribution made before the due date is "deemed to have been made on Dec 31 of the preceding tax year" which makes it a 2020 contribution made in 2020 for tax purposes .
So it can be applied to the 2020 conversion which is probably the reason for having the IRS worksheet 1-1, otherwise it would not be allowed under the normal 8606 rules.
I guess the problem I have with this is that if contribution in following tax year counts in prior tax year for purposes of assessing what portion of deductible contributions are taxable when converting a particular traditional IRA with non deductible contributions to a Roth IRA, this does not count in assessment of total fair market value of all traditional and SEP IRAs which is assessed as of Dec 31 2020. It just seems a loophole in worksheet that potentially benefits tax payer if they delay making contribution to an IRA for 2020 instead of on Dec 31 to Jan 1 of following year!
Hi Dmertz, I heard you are an expert on this. I read this thread and saw that turbotax uses 590b 1-1 worsheet. however,My 8606 line 5 , line 13 and line 14 have incorrect entries. Is this an expectation of using worksheet 1-1? I contributed $7000 to traditional IRA in May 2020 and converted all to Roth IRA. My total basis in traditional IRA should be $0 for 2020 and earlier years (line 14), and line 13 should be $7000. But TT gave the reverse instead, line 13 is 0 and line 14 is $7000. My line 5 should be $7000 but TT left it blank. (my line 3 is $7000 which is correct, line 4 is correct- blank as I didn't contribute in 2021 from Jan -Apr 15). I called TT help line twice and started a ticket but nothing has happened. The investigation number is 12826. Can you shed some light? I am concerned my total basis in traditional IRA is carried forward incorrectly to the next year. It should be zero, but TT 8606 form says $7000.
Did you enter the 1099-R for the conversion and answer yes to the "did you track non-deductible contributions" question?
What is on the 8606 line 16 & 17?
Hi Champ,
yes. I entered the 1099-R for the conversion and answered yes to the "did you track non-deductible contributions" question? 2 separate help line agents walked me through (or watched me) entering through calculations and decided there was an error, so one of them gave me an investigation ticket number because she said someone reported a similar issue.
What is on the 8606 line 16 & 17?--. both are blank on my 8606 form. line 18 is also blank. TT did tell me I don't have to pay tax for this conversion.
I also checked the IRA worksheet, basis carryover: line 3 is right after the latest update (0), a few weeks ago, it showed an incorrect number. line 36 still shows $0 (conversion contribution not taxable). I overrode it and made it $7000 hoping that it will fix line 13 or 14 in 8606, but it did not. Thanks for the quick reply!