Form 5329 T and S for first time homebuyers

[tslice]

My spouse and I both took early distributions from Roth IRA that went toward a first time home purchase.   Turbotax automatically generated Form 5329 (T) for myself but did not automatically generate Form 5329 (S) for my spouse.  Form 8606 was appropriately generated for both my spouse and me.  Our Form 1099-R are nearly identical other than the dollar amounts, and specifically the distribution code is J on both 1099-R.  The only difference I can think of in our retirement accounts is that I previously converted traditional IRA to Roth IRA (over 5 years ago) in addition to regular contributions.  Any thoughts on whether I should manually generate Form 5329 for my spouse?  Thank you!

[macuser_22]

The difference is probably your conversion.

Roth distributions of your own prior contributions are never taxable and a Traditional IRA conversion 5 years ago is the same as a contribution.  As long as you (and your spouse) did not withdraw more than your prior contribution then nothing would be taxable (or penalty) at all.  Only a distribution of earnings is taxable and subject to a penalty.    When entering the first time home home buyers exemption do not enter the amount of your own contributions that were withdrawn  (those are automatically not subject to the penalty), only enter the amount of earnings (that are subject to the penalty).   

For example:

Only the earnings will contribute to the $10,000 limit which means that if you have a Roth that contains $50,000 and $40,000 are Traditional IRA conversions or direct contributions and $10,000 is earnings, you can withdraw all $50,000 and the $10,000 exemption would only apply to the earnings so there would be no tax or penalties.   You only enter the $10,000 earnings in the interview for the exemption amount, not the entire $50,000 amount.

[dmertz]

TurboTax has what I believe is a bug but TurboTax Product Quality has declined to correct.  TurboTax will not generate Form 5329 for a fist-time homebuyer distribution from a Roth IRA if the amount on Form 8606 line 23 is zero (because the sum of your qualified first-time homebuyer distribution and your basis in original contributions is zero), even though your basis in contributions are less than the amount distributed and you would have a penalty were it not for the application of some or all of the distribution to the first-home purchase.

Make sure that you are not claiming as used for the first-home purchase any portion of the distribution that Roth IRA distribution would otherwise be nontaxable and penalty-free anyway (your basis in Roth IRA conversions more than 5-years ago plus your basis in original Roth IRA contributions).  These amounts are already tax and penalty free.

If any of your distribution would be subject to penalty without claiming the first-time homebuyer exception, a workaround to get TurboTax to prepare Form 5329 when Form 8606 line 23 is zero is to claim the exception on $1 less than you would otherwise claim.  This will cause $1 to appear on Form 8606 line 23 and cause TurboTax to generate Form 5329 where you can claim the first-time homebuyer exception on the same $1-lower amount.  The 10% penalty on that $1 will round to $0.

Be aware that TurboTax has another long-ago reported but still uncorrected bug that TurboTax will not present the first-home questions again when editing the Form 1099-R.  You'll need to delete the Form 1099-R and reenter it to get the first-home questions again. 

[dmertz]

In my previous comment I've added a workaround.

[tslice]

Thank you @macuser_22 and @dmertz for your quick and insightful responses.  I did confirm that I only input earnings (amount of distribution in excess of contributions and conversions which I agree are nontaxable) when prompted for amount applied toward first home.  The discrepancy was indeed likely due to my prior history of IRA to Roth conversion.  This resulted in a nonzero value for on line 23 of Form 8606 in my case but not in the case of my spouse (who has not converted IRA to Roth previously).  

I deleted and reentered my spouse's 1099-R in order to trigger the prompts for first-time home purchase.  Inputting an amount of earnings applied toward home purchase that was $1 less than the total amount of earnings withdrawn did result in a taxable event.  Although this ended up reducing my federal refund by $1, it importantly generated Form 5329 (S) for my spouse, and was an excellent proof of concept.  Thank you so much!