Return of Excess Contribution after backdoor IRA

[KyleP1]

Last year, I put in $7000 into a non-deductible IRA and converted it to a Roth IRA.  I received a 1099-R as a result of this conversion.

While doing taxes, I learned that I did not have earnings to contribute to the non-deductible IRA.  To make this simple, I had 0 earnings, so I learned that I have an excess contribution of 7000.

In turbotax, when I input that I plan to return $7000 in excess contribution (Traditional and Roth IRA contributions tab in deductions and credits), it deletes the 8606 form and on the 1040 form, the IRA distribution on 4a remains 7000 and the taxable amount on 4b becomes 7000 (instead of zero).  

How do I go about fixing this? 

[ThomasM125]

I assume the 1099-R form that you received has box 2(a) blank, indicating that the taxable amount is not known. If so, after your enter the form 1099-R, you need to indicate that you rolled the funds over to a "traditional or other retirement account", then it won't show as taxable on your tax return. You'll see that option when you edit your form 1099-R entry.

[KyleP1]

On the 1099-R (which is from the nondeductible IRA), 2a (from Fidelity) indicates that the taxable amount is 7,000, but 2b is checked (taxable amount not determined).

On Wages & Income, I did as you had suggested.  However, within deduction & credit, I input that my total nondeductible contribution was 7000. This is when turbotax flagged that this contribution wasn't allowed because my wages was 0 and was considered excess contribution.  

When I indicate that I will take out the 7000 excess contribution, it does what I indicated before - deletes the 8606 and the taxable amount becomes 7000 (instead of 0).

[ThomasM125]

I entered the information you gave in the program and the $7,000 is not taxable. It may be the order or the code in box 7 that is an issue. I entered the contribution first like you mention, then the distribution and used code 7 in box 7. I suggest you delete the form 1099-R entry and re-enter it. 

[KyleP1]

Thank you so much for helping out.  I very much appreciate it.

I tried deleting my 1099-R and reentering w/ code 7, and I am getting the same results.

Under the scenario below, if you put in 7000 in "Excess Contribution  Withdrawn Before Due Date of your Return" (within Deductions and Credits in Retirement & Investments), do you still get the same results?  The results would be a 0 in "traditional and roth IRA contributions" and an increase of the taxable income by 7000 on the 1040 form.

[GeorgeM777]

To follow-up on the response from @ThomasM125, did you include your traditional IRA basis on Form 8606?  You did indicate that the $7,000 amount that was contributed to your traditional IRA, and subsequently rolled over to a Roth IRA, was non-deductible.  Thus, Form 8606, line 14, should reflect a basis of $7,000, assuming this was your only non-deductible contribution to your traditional IRA.  If you have made other non-deductible contributions, your basis would need to reflect the total of prior year non-deductible contributions.  

@KyleP1

[KyleP1]

Yes.  On 8606 form, the starting tax basis is 0. It then shows that $7000 was contributed and $7000 was distributed, and taxable income was 0.  This is how all backdoor IRAs work.

The key issue, however, is the $7000 contribution amount when you do not have enough wages to cover it.  In this case, if you have $0 in wages, turbotax will indicate that the $7000 contribution is not allowed, and this excess contribution will need to be returned (or face the 6.5% per year penalty).  If you input that 7000 will be returned prior to the filing, then what I believe occurs in turbo tax is the $7000 excess contribution is then subtracted from the tax basis of $7000 and becomes a tax basis of $0.  And since your distribution of $7000 remains (via the 1099-R), you have taxable income of $7000. 

In prior years, you could recharacterize the converted amount, which would remove the 1099-r distribution, and then you could take the excess contribution from the non-deductible IRA, but this is no longer allowed.  And in this case, the excess contribution has to come from the Roth IRA because the nondeductible IRA has a balance of 0, but the program won't allow me to do that either.