Taxable IRA earnings during the year of contribution

[kjoltman]

Kimberly, nonworking spouse, made a $7000 nondeductible traditional IRA contribution in 2020 for 2019 and another $7000 for 2020 for a total of $14,000. 

The 1099R shows ($14,023.64) gross distribution (all money was converted to a Roth IRA).  $14,000 should be non taxable and $23.64 or rounded up to $24 earnings should be taxable yet Turbo tax is showing all as being non taxable.  What do we need to do?  What did we do incorrectly?     

[DanaB27]

Yes, only the $23,64 should be taxable on line 4b of Form 1040. What is in box 2a of your 1099-R?

On your 2019 return you will have to enter the nondeductible contribution (please see How do I amend my 2019 return? if needed):

1. Click on "Search" on the top right and type “IRA contributions”
2. Click on “Jump to IRA contributions"
3. Select “traditional IRA”
4. Answer “No” to “Is This a Repayment of a Retirement Distribution?”
5. Enter the amount you contributed $7,000
6. Answer “No” to the recharacterized question on the “Did You Change Your Mind?” screen
7. Answer the next questions until you get to “Any Nondeductible Contributions to Your IRA?” and select “No” if you didn't have any nondeductible contributions before 2019.
8. On the “Choose Not to Deduct IRA Contributions” screen choose “Yes, make part of my IRA contribution nondeductible” and enter the amount.

On your 2020 tax return you will repeat the steps:

1. Click on "Search" on the top right and type “IRA contributions”
2. Click on “Jump to IRA contributions"
3. Select “traditional IRA”
4. Answer “No” to “Is This a Repayment of a Retirement Distribution?”
5. Enter the amount you contributed $7,000
6. Answer “No” to the recharacterized question on the “Did You Change Your Mind?” screen
7. Answer the next questions until you get to “Any Nondeductible Contributions to Your IRA?” and select “Yes” 
8. Enter $7,000 (assuming you didn't have any other basis prior)
9. On the “Choose Not to Deduct IRA Contributions” screen choose “Yes, make part of my IRA contribution nondeductible” and enter the amount.

On your 2020 tax return enter the 1099-R distribution/conversion: 

1. Login to your TurboTax Account 
2. Click on "Search" on the top right and type “1099-R”
3. Click on “Jump to 1099-R”
4. Click "Continue" and enter the information from your 1099-R
5. Answer questions until you get to “What Did You Do With The Money” and choose “I moved it to another retirement account”
6. Then choose “I did a combination of rolling over, converting, or cashing out money.” and enter the amount next to "Amount converted to a Roth IRA account"
7. On the "Your 1099-R Entries" screen click "continue"
8. Answer "yes" to "Any nondeductible Contribution to your IRA?"
9. Answer the questions about the basis and value

[kjoltman]

I am still having problems properly taxing my ira earnings. My IRA basis  as of December 31, 2019 was in reality $0, because I made a $7000 contribution for 2019 in early 2020 and another $7000 for 2020.  (2019 taxes are correct).  When I put $0 as my basis it doesn’t tax the $23.64 earned (shown in my 1099r box 1 and 2a as14,023.64) and if I  put $7000 as my basis it taxes all $14023.64.  If I put $14000 it taxes $16, closer but not correct.  If I put anything other than $0 it also makes me provide an explanation.  Help!

[macuser_22]

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@kjoltman wrote:

I am still having problems properly taxing my ira earnings. My IRA basis  as of December 31, 2019 was in reality $0, because I made a $7000 contribution for 2019 in early 2020 and another $7000 for 2020.  (2019 taxes are correct).  When I put $0 as my basis it doesn’t tax the $23.64 earned (shown in my 1099r box 1 and 2a as14,023.64) and if I  put $7000 as my basis it taxes all $14023.64.  If I put $14000 it taxes $16, closer but not correct.  If I put anything other than $0 it also makes me provide an explanation.  Help!

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Your 2019 contribution made in 2020 must be reported on your 2019 tax return.    If non deductible then you must have a 2019 8606 showing the non-deductible contribution on line 1, 3 & 14.

Tax law says a contribution for the prior year made before the filing date is "deemed" to have  been made on Dec 13 of the previous year so your 2019 year end basis is not zero.

Be sure that you entered the 2020 non-deductible contribution in the 2020 IRA contribution interview.   The when it asks for the prior years basis enter the 2019 8606 box 14 amount.

[DanaB27]

A contribution that you make in 2020 for 2019 is deemed to be have made on December 31, 2019. Therefore, you will answer $7,000 for the basis on December 31, 2019.

You removed the whole balance of your traditional IRA's? Or did you have any traditional IRA's with a balance left? If yes, the only some of the nondeductible contribution will allocated to the conversion. The rest of your basis would be allocated to the amount left in the traditional IRA. Please make sure you enter the value of all your traditional IRA's on December 31, 2020.