Line 14 on Form 8606 did not deduct the basis for a non-deductible IRA contribution we made during the year, and had returned the same year. Any help on why not?

[dmertz]

What is the code in box 7 of the Form 1099-R provided by the payer?
Is the IRA/SEP/SIMPLE box marked?
Did you enter the traditional IRA contribution?  If so, did you indicate anything in the follow-up about having the contribution returned?

[darylwalker1]

Two 1099-R's were issued; one had 81 in box 7 ($5,500 in box 1, which was our original contribution); the other had 1 in box 7 ($69 in box 1).  The IRA/SEP/SIMPLE box was marked on both.  I did enter the original $5,500 contribution in Turbo tax for the question "... total 2017 traditional contributions."  I probably missed it, but where do I indicate in the follow-up about having the contribution returned?  Thank you.

[dmertz]

If the contribution was not an excess contribution, TurboTax will not ask you whether or not you had any of the contribution returned, despite the fact that a return of a non-excess contribution to an IRA is permitted.

The code 81 Form 1099-R is for the return of your original contribution and, since the gross amount is equal to the contribution amount being returned, implies that there was no gain or loss attributable to the contribution that was returned.  I'm not sure why you would have received a separate code 1 Form 1099-R.  Perhaps the custodian botched the original gain calculation and subsequently distributed $69 of gain attributable to the $5,500 that was returned.  That doesn't change the taxable amount; the $69 is taxable and subject to penalty either way.  However, with the gain reported on a separate code 1 Form 1099-R it ends up looking like a distribution that is eligible for rollover when it actually was not (which doesn't really matter as long as you did not roll it over).

To correct the problem on Form 8606, I would simply omit reporting the $5,500 traditional IRA contribution entirely by going back through the traditional IRA contribution section and deleting the $5,500 originally entered.  You'll still need to enter the two Forms 1099-R.  You'll also need to provide an explanation statement for the return of contribution, but it seems that TurboTax does not prompt you to prepare one under these circumstances, so you'll probably need to prepare the explanation statement manually and include it with your mailed tax return.

[dmertz]

After looking again, I think TurboTax does prompt for an explanation statement after entering the code 81 From 1099-R.

However, in looking again I've also found that the TurboTax developers have introduced a new bug for 2017, a bug not present in 2016 TurboTax.  2017 TurboTax is treating the entire gross amount of the code 81 distribution as subject to penalty, not just the taxable amount.  I'll report this new bug.

[darylwalker1]

Thank you!  I just noticed the same thing.  I'm being assessed incorrectly an additional tax on row 59 of Form 1040.  The amount on row 59 is $160, which is the basis in my non-deductible IRA's at 12/31/16 times 10%.  Do you have an ETA on how long it might take Turbo Tax to fix?  Anything I should do more on my end, or just wait for the fix?  Really appreciate your help!

[macuser_22]

Is there anything in box 2a on the code 81 1099-R?

[dmertz]

I've reported the bug.  The turn-around time on this sort of bug fix is somewhat unpredictable.  It has to do with how Product Quality prioritizes the bug relative to others.

With a code 81 or P1 Form 1099-R with the IRA/SEP/SIMPLE box marked, TurboTax is presently ignoring box 2a amount in determining the amount subject to penalty and is using the box 1 amount instead.  TurboTax *is* using the box 2a amount when determining the taxable amount to be included on Form 1040 line 15b or Form 1040A line 11b.

My only suggestions for a workaround are to use the CD/download version of TurboTax and override Form 5329 Early Distributions Included in Gross Income Smart Worksheet line A to show just the $69 from the code 1 Form 1099-R (overriding requires printing and mailing your tax return) or omitting the code 81 Form 1099-R, printing your tax return, modifying Form 1040 line 15a or Form 1040A line 11a to add $5,500 (for a total of $5,569, assuming no other IRA distributions), then mailing your modified tax return with a manually prepared explanation statement.

[macuser_22]

First part edited out because the box 1 amount should still be reported on line 15a or 11a on 1040 or 1040A.

Could  put code 82 in box 7 that would have the same result if box 2a has nothing in it.

[dmertz]

Ah, good suggestion about changing the code 1 on the code 81 Form 1099-R!  Assuming that box 2a is zero or blank, simply eliminating the code 1 will eliminate the penalty on the $5,500.  You can either use code 2 in place of code 1 or simply remove the code 1, leaving only code 8.  That's a much better workaround than any that I have suggested and permits e-filing.  Because there is no tax withholding on the Form 1099-R, the IRS will be blind to the fact that you eliminated the code 1.

Leaving the code 81 Form 1099-R out entirely will produce an incorrect total on Form 1040 line 15a or Form 1040A line 11a, so that would not be a good workaround.

[dmertz]

However, I'm puzzled as to why you are seeing a penalty of only $160.  When I enter a code 81 Form 1099-R with $5,500 in box 1, $0 in box 2a and the IRA/SEP/SIMPLE box marked, I see a $550 penalty on Form 1040 line 59 (although the correct penalty is zero).

[macuser_22]

I edited the first part of my last comment.

[darylwalker1]

Thank you both!  Box 2a is zero.  I have changed code 81 to code 82 on Form 1099-R, and that seemed to work!  Great news!!

dmertz - The additional Form 5329 tax calculation of $160 (which is included on row 59 of Form 1040) is calculated $1,602 times 10%.  I cannot find the source of the $1,602  (in my previous post, I incorrectly indicated that the calculation was considering my 12/31/2016 non-deductible basis of $16,000, which I don't think is correct).  In any case, when I change the code from 81 to 82, everything seems to look OK.  Thanks again.

[darylwalker1]

Follow up question on Form 8606.  As noted previously, I received a 1099-R for $69 (included in Box 1 and 2a).  This $69 represents the gain on investment I held between the time I made a $5,500 non-deductible IRA contribution, and the time I was refunded the $5,500 non-deductible IRA contribution.  Specifically, in 2017, I contributed $5,500 and then later changed my mind in 2017 and asked that the $5,500 be refunded.  I was ultimately refunded $5,569 ($5,500 + $69 gain).  I understand I owe taxes, and any penalties, on the $69 (or at least I think I understand).

Form 8606 lines 4 - 14 is performing a pro-rata calculation on the $69, and ultimately reducing my basis in line 12 by $2 (line 15c is indicating a taxable amount of $67).  My question is why any portion of the $69 would be reducing my basis at all?  Seems to me I should just be paying taxes and any penalties, on the entire $69 without touching my basis?

[dmertz]

Ah, you are correct.  To get TurboTax to treat the entire $69 as taxable, subject to penalty, and not reduce your basis, it needs to be reported with codes 1 and 8.  However, doing so will result in the IRS seeing this reported differently from the way it was reported directly to them on the Form 1099-R sent to the IRS by the payer.  I would probably change the code on the $69 Form 1099-R to 1 and 8 and include explanation of that within the explanation of the return of contribution.