Why does Roth IRA over contribution show as income? I over contributed $1200.00 and withdraw this in the same year. Why does the full amount shows as income?

[DanRC]

I made a $1200.00 over payment to my Roth IRA in 2020. The overpayment plus a small amount of gain was removed in 2021 prior to the tax filing deadline so the withdraw should correct my overpayment in the same year, 2020. I received a 1099-R for 2021 showing the full distribution, $1200.00 plus the gain of $209.71. I would expect that I should only have to pay tax on the $209.71. TurboTax is showing the full $1410.00 as income. Why?

[DanaB27]

Please check Form 1040 line 4 to verify that only the gains are taxable on line 4b.

To preview Form 1040:

1. Click on "Tax Tools" in the left menu
2. Click "Tools"
3. Click "View Tax Summary" in the Tool Center window
4. Click on "Preview my 1040" on the left

Please be aware, that the whole distribution will show as income in TurboTax on the summary screen which shows gross income, not taxable income. To see the taxable income you will need to check line 4b on Form 1040.

To verify, your Form 1099-R should show the distribution plus gains in box 1 ($1,410), only the gains in box 2a ($209.71), and the code in box 7 should be P and J, correct?

@DanRC 

[Edited 4/5/2022 | 2:09pm PST]

[DanRC]

I tried following the suggesting, but there is no "Preview my 1040" option. The tax summary only shows one page at a high level. The only thing I was able to do, after paying, was to print my 1040 and then review. However the data doesn't appear correct. I have no amount entered in 1040 4b but I do have a form 5329 created and I'm being taxed on the $1200.00 at 6% (penalty tax) this is wrong. These funds were removed in the same IRA year that they were added so I should not be hit with the 6% penalty. Maybe I'm misinformed, but it was my understanding that you have till the tax filing date, e.g. 4/15/2021 to contributed / correct 2020 IRA contributions. The $1200.00 was removed in 2021 prior to the tax filing dead line so this should apply to 2020 thus I should not have any overpayment penalty.

[DanRC]

I don't know if this changes things, on the 1099-R the line 7 codes are PJ, P excessive contribution and J early distribution. This makes sense, since I had to remove the amount that I over contributed plus the gains. This was corrected on 3/18/2021. Same IRA year (2020) where the excessive contributions were made. Again it's my understanding that since I corrected the excessive contributions in the same year, I should not have a 6% penalty.

[DanaB27 · Accepted solution]

The 2021 Form 1099-R with codes P and J needs to be reported on your 2020 tax return since earnings ae taxable in the year the contribution was made for. If you entered it on your 2021 tax return TurboTax should have gave you a message that you might need to amend your 2020 tax return. 

Please be aware, if you had tax withholdings then you must enter the Form 1099-R with codes PJ on your 2020 and 2021 tax return. It must be entered on the 2021 tax return to apply the taxes withheld to 2021. The 2021 code P will not do anything to the 2021 tax return but the withholdings will be applied to 2021.

Yes, you do not have to pay the 6% penalty in 2020 or 2021 since your withdrew the excess plus gains before the 2020 tax return due date. It seems the excess contribution got carried over to 2021. You might want to check your 2020 tax return if the 6% penalty got calculated on Form 5329. If yes, then please go to the IRA contribution interview and enter the excess contribution amount on the penalty screen as withdrawn before the due date.

To remove the excess contribution on your 2021 tax return:

1. Click on "Search" on the top right and type “IRA contributions”
2. Click on “Jump to IRA contributions"
3. Select “Roth IRA”
4. On the "Do you have any Excess Roth Contributions" answer "Yes"
5. On the "Enter Excess Contributions" screen delete the amount that was carried over.

@DanRC

[DanRC]

Thank you so much DanaB27! You were spot on. I discovered a 5329 form was being generated that contained the $1200.00 from 2020, even though I didn't file through TurboTax. I started a 2020 return but never completed ... long story. I spent an hour with a TT support agent trying to figure out how resolve this but had no luck.

The steps you listed worked perfectly. I was able to clear the $1200.00 that got carried from 2020 and after which I no longer had a 5329 from generated and no more penalty tax. You are also correct, I was informed about filing an amendment to my 2020 return. Thank you again!