traditional ira excess contribution penalty error

[kfabi]

Hi,

My husband and I are 50+, filing jointly, with a small business, and we made the $7000 limit contributions to our traditional IRAs for/in 2021.

TT says: 

"Deductible IRA contributions cannot exceed $6000 ($7000 if you're age 50 or older) and must be equal to or less than your earned income. One or both of these apply to you, which means you also have a non-deductible excess contribution of $6162."

and tells us we have a penalty.

As mentioned earlier, we are over age 50 and the $7000 is less than our individual incomes. Neither of the above reasons apply, so we shouldn't be incurring the penalty, correct? Stumped on how/where the excess is coming from since we contributed the correct amounts for years and didn't have issues previously.

[FangxiaL]

If you have earned income more than $7,000, you should have no problem contributing to your IRAs. Have you entered your income information into TurboTax? The requirement is earned income such as income reported on W-2 forms or Schedule C forms.

[bosso3]

Hopefully a tax expert will review this and add comments.

I suggest you review https://www.irs.gov/publications/p590a  which discusses IRAs.

Note that the sentence from Turbotax refers to "your earned income", and you referred to "incomes".

The above link states you need to have "received taxable compensation" during the year.  It describes what is compensation and what is not compensation.  Check your data - it seems likely some of your income did not qualify as "taxable compensation."

If you made excess contributions, that link states "

Withdrawal of excess contributions.

For purposes of determining excess contributions, any contribution that is withdrawn on or before the due date (including extensions) for filing your tax return for the year is treated as an amount not contributed. This treatment only applies if any earnings on the contributions are also withdrawn. The earnings are considered earned and received in the year the excess contribution was made.

If you timely filed your 2021 tax return without withdrawing a contribution that you made in 2021, you can still have the contribution returned to you within 6 months of the due date of your 2021 tax return, excluding extensions. If you do, file an amended return with “Filed pursuant to section 301.9100-2” written at the top. Report any related earnings on the amended return and include an explanation of the withdrawal. Make any other necessary changes on the amended return."

I hope this helps.

[VolvoGirl]

Make sure all the income is assigned to the right person.  check the Schedule C and W2s.  And the contributions are for the right person.  

For an IRA contribution.  If you only have self-employment income you can only contribute up to your net profit reduced by the deduction allowed for one-half of your self-employment taxes.  See IRS publication 590 http://www.irs.gov/pub/irs-pdf/p590a.pdf

So how much is the Net Profit on Schedule C?

So check 1040 Schedule 1 line 15.  You have to deduct that amount from your Schedule C Net Profit.  That will give you the allowed contribution for the 1099NEC income.

[KCinIN]

As I read this post, I think I am having the same issue.  I had contributed to a Roth account prior to completing my TurboTax entries, only to find I was over the limit for a Roth contribution.  So, I am in the process of recharacterizing my Roth contributions as traditional IRA contributions, including reporting the recharacterization in TurboTax.  I was expecting TurboTax to confirm that I was making a "non-deductible" contribution to my traditional IRA.  Instead, TurboTax is telling me I am making an "excess" contribution to my traditional IRA and that I am subject to the excess contribution penalty.
My questions:
1. I didn't think one could make an excess contribution to a traditional IRA, that excess only applied for a Roth IRA.  Why would this contribution trigger an excess contribution penalty warning?

2. I am over 50 so the $7000 involved should not be "excess" anything.  With the recharacterization I should be contributing at my limit to the traditional IRA, and no penalty should apply.  Why the warning?

[bosso3]

Did you or your spouse have taxable compensation in 2021? 

Publication 590-a https://www.irs.gov/publications/p590a#en_US_2021_publink[phone number removed]

states

"You can open and make contributions to a traditional IRA if you (or, if you file a joint return, your spouse) received taxable compensation during the year.

You can have a traditional IRA whether or not you are covered by any other retirement plan. However, you may not be able to deduct all of your contributions if you or your spouse is covered by an employer retirement plan. See How much you can deduct, later."

I suggest you refer to the above link and read the section titled "Who Can Open a Traditional IRA?"

[KCinIN]

Yes, I have the taxable compensation requirement covered.  I may have stumbled across the answer to this.  When I went back to the IRA contributions summary in TurboTax it showed a total of $14000, not the $7000 I thought I was indicating in the entry screens.  It seems TurboTax understands the "I contributed $7000 to a traditional IRA" and the "I recharacterized my $7000 Roth contribution to my traditional IRA" as separate entries and not two sides of the same action.  By stating I did not contribute to my traditional IRA and using only the recharacterization of my Roth contribution to my traditional IRA I get the response from TurboTax that I expected, that my contribution is non-deductible.
I would love it if someone from TurboTax can confirm this is the correct approach for my situation.  I feel like it's a little non-intuitive that I should state I have not contributed to my traditional IRA when in fact my recharacterized contribution is doing exactly that.  But, I guess it is being reported one way or another...

[bosso3]

I am not from Turbotax, but I this year, did exactly the same transaction you did, and turbotax processed it as expected.

To clarify the jargon, IRS uses the terms "recharacterized" and "contributions", and turbotax uses the IRS terms.  "Recharacterized" basicly means "moved" from one type of IRA to another.

"Contributions" means adding new money.

If you need to blame someone, blame the IRS.

[DanaB27]

Yes, that is correct. When you recharacterize a Roth contribution then you will not enter it as a traditional IRA contribution but enter the recharacterization when you enter the contribution to the Roth IRA:

1. Login to your TurboTax Account 
2. Click on "Search" on the top right and type “IRA contributions” 
3. Click on “Jump to IRA contributions"
4. Select “Roth IRA”
5. Answer “No” to “Is This a Repayment of a Retirement Distribution
6. Enter the Roth contribution amount 
7. Answer “Yes” to the recharacterized question on the “Did You Change Your Mind?” screen and enter the contribution amount (no earnings or losses)
8. TurboTax will ask for an explanation statement where it should be stated that the original $xxx.xx plus $xxx.xx earnings (or loss) were recharacterized.
9. On the screen "Choose Not to Deduct IRA Contributions" answer "Yes" (if you are thinking about doing a backdoor Roth. If you have a retirement plan at work and are over the income limit it will be nondeductible automatically and you only get a warning and then a screen saying $0 is deductible)

You will get Form 1099-R  for the recharacterization with code R-Recharacterized IRA contribution made for 2021 and this belongs on the 2021 return. But a 1099-R with code R will do nothing to your return. You can only report it as mentioned above. Therefore, you can ignore the 1099-R with code R when you get it in 2023. The box 1 on the 1099-R will report the total recharacterized amount (contribution plus earnings) but it does not separately report the earnings and box 2a must be zero.

@KCinIN