In the IRA section, TurboTax ask if you made and kept tract of any nondeductible contribution in prior years (This is not common).

[dmertz]

This is discussed on page 36 of 2017 IRS Pub 590-B in the context of distributions from Roth IRAs, but the concept is the same.  This deduction was suspended for tax years 2018 through 2025 by the Tax Cuts and Jobs Act of 2017.

[dhuynh44]

@dmertz 

Question, would having an outstanding recharacterization from year 2021 for an amount contributed in 2020 create a basis that can be taxed?  This amount was also converted to Roth in 2021.   Thank you 

[dmertz]

The recharacterization in 2021 of a Roth IRA contribution for 2020 to be a traditional IRA contribution instead could result in either a deductible contribution or a nondeductible contribution depending on your 2020 modified AGI and participation in an employer-provided retirement plan in 2020.  If that contribution was nondeductible, your 2020 tax return should have included Form 8606 reporting that nondeductible contribution and would have resulted in basis shown on line 14 that would carry forward to line 2 of your 2021 Form 8606 to be used in calculating the taxable amount of any Roth conversions that you did in 2021.

[dhuynh44]

@dmertz 

thanks for the info.  Yes it was a nondeductible contribution (recharacterized).  My intention of doing clean backdoor Roth’s obviously didn’t work as intended.  For 2021I had a cash amount ($500) at the end of the year  and recharacterized amounts ($1000) in 2021 for year 2020.   So essentially even though my balance in my traditional at end of year 2022 is $0, and I have converted all dollars in the traditional to Roth (including all recharacterizations 2020-2021) up to year 2022, I would still end up having some sort of basis on line 14 of 2021?   

How do I get my basis back to $0 if I have nothing in my traditional?  I think this is where I’m confused.  Also, would I be paying taxes on only the earnings of my outstanding recharacterizations?  Is the IRS interpreting my recharacterizations as a balance in my IRA as to produce a non-clean backdoor Roth, hence taxing some of these recjaracterizations? 

[dmertz]

I am unable to follow the bits and pieces of the transaction history.  I would need to see a complete timeline of all of the transactions beginning with 2020 (along with any traditional IRA balance at the beginning of 2020) to be able to say what your Forms 8606 should have looked like.  Note that TurboTax does special calculations when you make nondeductible traditional IRA contributions and distributions/conversions in the same year which can add to the confusion.  Also, any recharacterizations done the in the year following the year in which the Roth IRA contribution was done are considered to be outstanding recharacterizations which must be included in the year-end balance on Form 8606 line 6 (or the equivalent line on Worksheet 1-1 from IRS Pub 590-B that TurboTax uses for the special calculation), which TurboTax normally does by asking about any outstanding recharacterizations.

What confuses people is trying to think of the traditional IRA contribution as being somehow intimately tied to the Roth conversion.  These are two essentially independent transactions other than the fact that the traditional IRA contribution creates basis which the Roth conversion consumes in some way.  The creation of the basis and the consumption of the basis is all handled automatically on Form 8606 (or Worksheet 1-1), so they should require no real thought.  Enter traditional IRA contributions for the year (or the Roth contributions with recharacterization) without any thought about any Roth conversions and separately enter any Roth conversions done in the year without any thought about traditional IRA contributions.

[dhuynh44]

@dmertz 

I truly appreciate your feedback.  I feel that I am grasping the overall idea, however the resulting numbers are what confusing me.  Based on what you just stated I feel that I did it correctly, however if it’s possible I can provide a concise breakdown of numbers next week if you are willing to take a look.  

have a great weekend!

[dhuynh44]

• @dmertz 

 “If that contribution was nondeductible, your 2020 tax return should have included Form 8606 reporting that nondeductible contribution and would have resulted in basis shown on line 14 that would carry forward to line 2 of your 2021 Form 8606 to be used in calculating the taxable amount of any Roth conversions that you did in 2021”

• so even though this recharacterization gets converted back to Roth and creates a basis moving forward to year 2021from 2020, I would get taxes on this amount plus gains, or just the gains?
• also, if I contributed nondeductible in 2021 for year 2020 straight to my traditional, does one pay taxes on these contributions similar to recharacterizations?
  
• Does contributing in year 2021 for year 2020 nondeductible into traditional also create a basis similar to recharacteizations?

thankyou!