Form 8606 / IRA Taxable Distribution Worksheet Change?

[cheitzig]

Hey group. Long-time TurboTax user. I think I posted here years ago about something, but I don't recall. I'm using TurboTax Deluxe on Windows.

I have a question / comment about how TT 2020 treats inherited IRA distributions (RMD) in 2020 only with back-door Roth IRA contribution (i.e., $7k non-deductible IRA contribution followed by immediate (next day) conversion of $7,000.02 to Roth IRA).

In previous years, TurboTax's calculation on the Form 8606 subform called "Taxable IRA Distribution Worksheet", line 5 ONLY included other Individual IRA distributions, and not (for example, in our case) an older (2013) Inherited, non-spouse IRA. Line 5 is labeled "Enter your distributions from traditional, SEP, and SIMPLE IRAs in 2020.". I don't think it should include an Inherited IRA based on the general guidance that the older inherited IRA is kept separate and isn't allowed to be converted to a Roth IRA. If I override line 5 to zero, the rest of the numbers on the worksheet don't calculate correctly (e.g., various numbers are negative), so that's not really a workable solution.

The actual tax impact is zero... but it changes the numbers on the worksheet and on form 8606 to suggest that some of the back door roth is taxable. Specifically, in my case, say the Inherited IRA RMD was $10k, so line 8 becomes 7000/17000 = .4117, etc.

In the end, the big change in TT2020 seems to be the non-zero value on line 5 which affects the rest of the calculations. I've looked through the IRS documentation that I can find, and there doesn't appear to be a change, although publication 590-B hasn't been updated so it's difficult to tell.

Wondering if anyone else in the community has seen this issue?

[dmertz]

It has been reported elsewhere on this forum that this bug is being investigated.  You'll need to wait for this bug to be fixed so that the distribution from the inherited IRA does not appear on your Form 8606.

[cheitzig]

Yes, thank you. I just found this post that addresses how to fix. Although I agree that a TurboTax bug fix would be better. 

Summary for anyone else seeing this: I can make the 8606 correct by saying yes to the question "Yes, xxx had nondeductible IRA contributions", and then changing the answer back to no.

Unfortunately, I already e-filed, because I thought I had corrected the issue. Which means I'll have to file an amended return to have the correct 8606 filed (please confirm anyone with an opinion, but I think so). Interestingly, the tax calculation is correct; just the form 8606 is wrong. So that's a bit unfortunate.

Thanks again for the reply!

[dmertz]

What I remember from the other posts is that this fix might undo itself, depending on your later path through the entries.

I'm not sure how the calculation could be correct with an extraneous distribution appearing on the form.

[cheitzig]

I agree it seems surprising, but the amount that is feeding to line 4b on form 1040 is correct (i.e., in my example above, line 4a on 1040 is 7,000 + 7,000 + 10,000 = 24000 (two Back Door Roth's plus Inherited RMD, and line 4b is 10,000 (just the Inherited RMD) . So Form 8606 is wrong, but weirdly, doesn't add up, I guess.

But I also agree... the "fix" doesn't stick... if I save the file and re-open, it comes back. So I'll have to amend either way. Fortunately, I did a compare of the PDF output of the original PDF and the "fixed" one and the 8606 form is the only filing form that is different (the IRA Information Worksheet is also different, but not filed).

So I suppose as soon as the IRS publishes 1040-X, even if TurboTax doesn't fix the issue, I can just amend and file that one form. But it'll be easier if I just can use TurboTax.

[cheitzig]

Slight update: I just got off the phone with TT Support asking when the bug would be fixed. They looked through their issues... and didn't seem to have an issue logged. Now that might be incorrect, but I thought it was interesting.