Two 1099-r's one code 7 'normal distribution' and one code N for recharacterization. TurboTax is still reporting the normal distribution as taxable income.

[dmertz]

Why do you believe the code 7 amount is not taxable income?

[RTW45459]

I know that they normally would be, but because the full amount was recharacterized in the same year, there shouldn't be any tax liability

[dmertz]

Please elaborate.  Was the code 7 Form 1099-R for a distribution from a traditional retirement account converted to Roth and you subsequently recharacterized that conversion or did you recharacterize something else and subsequently made a normal distribution?  In other words, which transaction came first?

[RTW45459]

Yes, the code 7 was from a traditional IRA converted to Roth and then subsequently recharacterized.  The normal distribution came first, the recharacterization three months later, plus or minus, same year

[dmertz · Accepted solution]

Go back and edit your entry of the code 7 Form 1099-R.  In the follow-up, TurboTax will ask you if you recharacterized any portion of this distribution back to a traditional IRA.  Answer Yes, then indicate the amount of the original conversion (perhaps the entire amount) that was recharacterized back to a traditional IRA.  TurboTax will exclude the amount recharacterized from the amount reported on Form 1040 line 15b or Form 1040A line 11b.

If the code 7 Form 1099-R has an amount in box 4, this is an amount that was not originally converted to Roth unless you substituted funds from another source to complete the conversion of the entire gross amount.  If you did not replace the amount withheld for taxes, that is an amount that remains distributed from the traditional IRA and is subject to tax.

Note that the amount reported in box 1 of the code N Form 1099-R is the amount transferred back to the traditional IRA, not necessarily the amount recharacterized.  The amount transferred is the amount recharacterized adjusted for gain or loss while in the Roth IRA, so be sure in the follow-up to enter the amount recharacterized, not the amount transferred, if different.

[RTW45459]

The question that follows "What Did You Do with the Money from ....you need to answer "Moved the money to another retirement account (or returned it to the same retirement account".  Then you are asked "Rolled Over all of this money to another traditional IRA or other retirement account (or returned it to the same account)"  I mis-interpreted that option because it was NOT a rollover, but 'returned it to the same account' fixes the problem.

[dmertz]

No, that is not correct (although it might give the same result).  You must indicate what you *originally* did with the money.  Indicate that you moved the money to another retirement account and indicate that you *converted* the money to Roth.  After that, TurboTax will ask you if you moved any of it back to a traditional IRA.

[dmertz]

Doing it the correct way should cause TurboTax to prompt you to complete the required explanation statement for the recharacterization while doing it the incorrect way might not.

[RTW45459]

I did as instructed, Turbo Tax did ask that question, and I checked "All of it", but the program is not excluding it from taxable income even though I answered that question correctly.  My answers:
Did X Inherit this IRA "No"
What did you do with the money from Y? (Moved the money to another retirement account)
Chose which of the following applies: (Converted all of this to a Roth IRA account)
Did X Move any part of the converted $ from a Roth IRA back into a Traditional IRA (Yes, X moved some or all of the money back into a traditional IRA)
How Much of the converted funds did X recharacterize (The Entire Amount)
THE FULL AMOUNT REMAINS as taxable.  The 'only way' I can get TT to 'cancel that out' is to say it was rolled over...which I agree, it was not.

[RTW45459]

Part of the 'problem' is that the second 1099-r with code "N" is being included in the IRA distributions on line 15a when it should not be.  That 1099-r shows 0 as the taxable amount, but it's showing up on 15a as a distribution when it was, in fact, a recharacterization

[dmertz]

Line 15a reports the gross amount, not the taxable amount.  The taxable amount appears on line 15b.  The sum of the box 1 amounts from the code 7 and code N Forms 1099-R should appear on line 15a and line 15b should be zero (assuming no other Forms 1099-R reporting IRA transactions).

[RTW45459]

And THAT is the problem...15a shows the sum of both 1099-r's the Code 7 and the Code N and line 15b shows the full amount of the code 7 1099, it's not cancelling that out even though the questions were answered appropriately.

[RTW45459]

Okay, something else is the cause of the problem...I started a new return with no information in it and entered the 1099-r code 7....and on that new return, the taxable amount shows up as "$0", so there's something in my 'real' return that is telling the program, that is still taxable even though I think it shouldn't be....so what other questions might be causing that, any idea?

[dmertz]

I suggest deleting and reentering the code 7 Form 1099-R.