Turbox Tax not correctly calculating tax for 401K to Roth IRA conversion (Previous year IRA basis is not taxed)

[aagarwal2]

I converted some ($70K) of my 401K to Roth IRA, I understand this is a taxable event and for whole $70K I should be taxed.

1. I received one 1099-R for 401K to Traditional IRA conversion. I entered this and no tax deducted. This is fine and as expected.
2. Received another 1099-R for Traditional IRA to Roth IRA Conversion. I entered Roth conversion and Turbo Tax deducted the tax on the whole $70K, again fine and as expected.
3. (Problem Step): Turbo Tax now asks for previous year IRA Basis (Backdoor IRA conversions I have been doing, Form 8606). My Previous year IRA Basis is 18000 (All of this money was converted to Roth IRA), now if I enter this amount. Turbo Tax incorrectly reduces  the taxable amount from step 2 by 18000. Similarly when I enter 2022 another 6000 backdoor conversion, it reduces the taxable amount from step 2 by another 6000. This looks incorrect, I should be fully taxed for the amount in Step 2.  (Cross checked in going in the 1040 form view  and turbo tax is considering IRA Distribution taxable amount = 46K instead of 70K)

How to fix this / what am I doing wrong. Let me know if you need any additional information.

I tried with both Turbo Tax Desktop and Online edition, both shows the same issue.

Thanks for the help. Appreciate it

[DanaB27 · Accepted solution]

You stated "Previous year IRA Basis is 18000 (All of this money was converted to Roth IRA)" if this money has been already converted then the basis shouldn't be $18,000. What was your basis for your 2021 Form 8606 line 14?

For example, you make the nondeductible traditional IRA contribution of $6,000 then you have a basis of $6,000 listed on lines 1, 3, and 5 of Form 8606 (assuming you didn't have a prior basis and the account was empty before and will be empty after the conversion). When you make the conversion of the $6,000 right away and have no earnings, you will have a $6,000 nontaxable portion on line 13 and this will reduce your basis on line 14 to $0. If you make a backdoor Roth as intended then you use the basis up each year when you make the conversion (it gets more complicated if you make the contribution for one year and convert it the next year).

Assuming your basis of $18,000 would be correct then yes this prior year's basis would be used to calculate the nontaxable portion of the total conversion. You can't choose to just convert the taxable part and save the basis for later. If you have pre-tax and after-tax funds mixed in the traditional IRA then the pro-rata rule applies. Please be aware, that all traditional/SEP/SIMPLE IRA accounts are considered to be one account for the IRS.

[aagarwal2]

Thanks for the details. Makes lot of sense.

My Basis then should be 0 because I always did the backdoor roth conversion. If I mark the basis ia 0 then the calculation is correct. I believe all these years I have been doing the mistake and carrying over basis of 6000 every year.

I can fix the 2022 returns (Filed for an extension so I am yet to file it).

Do I need to fix the previous returns as well ? It doesn't change the tax amount in any way just have the incorrect basis.

[DanaB27]

Yes, you will need to file a corrected Form 8606. If it will affect your tax return then you need to file an amended tax return if it doesn't then you can just file Form 8606 by itself. Please download the correct Form 8606 for each year here or see How do I amend my federal tax return for a prior year?