Why is Recharacterized of Roth Contribution taxable

[macuser_22]

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@rkierski wrote:

As it turns out... it doesn't appear that line 14 is actually copied.  But rather a line from an IRA worksheet.  And, when I did my 2019 taxes I answered a couple of questions wrong.

TurboTax asks for the total of all traditional IRA's as of 12/31.  To which I said "$0".  On that same page, it asks for the total of outstanding recharacterizations.  I left that blank, it assumed $0.

The problem is in the wording.  As I had already completed the both recharacterizations, there weren't any outstanding or in progress at the time of the question.  But it should have asked if I'd done any recharacterizations since 12/31 for 2019... which I had.

For line 14, TurboTax correctly calculated the basis with the information I'd provided -- the total of the 2 recharacterizations minus the amount converted to Roth.  But in the Wrks, it should have reported an error because the value for line 14 that it calculated was different than the value in the Wrks -- $0.

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NOTHING about a 2019 recharacterization goes in the 2020 tax return at all.   That is reported on the 2019 tax return.      The 8606 box 14 that you enter in the interview comes from the *2019* 8606 for the recharacterization.    There are no 2020 outstanding recharactorizations.

If you do not have a 2019 8606 with the amount of the recharactorized  contribution (not including earnings) on line 14 the you have not filed your 2019 tax return  properly.

[rkierski]

Right.... Maybe I wasn't clear...

The original question I answered wrong was while I was doing my 2019 taxes.  Just now, when I was doing my 2020 taxes it asked for my wife's basis, which it said it had imported from our 2019 taxes and had a value of $0 preloaded in the space.  I assumed that value was correct.

When I redid my 2019 taxes and answered the question correctly, and then redid my 2020 taxes, it had the correct value preloaded in the space when it asked for my wife's basis.

While doing my 2019 taxes, it asked what I did with the recharacterized contributions.  I selected "I converted all of this to Roth IRA".  Having made that selection, I don't know how it accounted for the difference in values, or why it didn't flag the difference as an error.

[rkierski]

... and when I say "difference in value" I mean that line 14 of my 2019 8606 is correct, but the value shown in the 2019 IRA worksheet and the value imported in my 2020 IRA worksheet doesn't match the value on line 14 of my 2019 8606.

[macuser_22]

That is entirely possible depending on when yiu added the recharacterization  and when  you imported from 2019.    Imported data must always be checked and corrected if necessary.   That is why the 2020 1099-R in interview asks for the 2019 or earlier  basis and if not correct allows you to change it to  the correct mount.

[rkierski · Accepted solution]

I was asked this morning if my problem was resolved and if it was, to pick the answer that was most helpful.

Yes, my problem was resolved.  I would say that the solution was found using information I got from some of the postings here.  I would also say that @macuser_22 gave many good and informative responses, for which I am grateful.

But the solution to my problem was to go back and look at the forms and worksheets of my 2019 taxes and make sure the information that was transferred from the 2019 taxes to my 2020 taxes actually made sense.  @dmertz had posted a response to a related question last year that I reread that was also helpful -- Ignore the Code-R 1099-R that I would get in 2020.  Someone made a similar comment here -- that the Code-R 1099-R I got for in 2021 for 2020 isn't used in my 2020 taxes.

So... if someone has stumbled on this discussion because they feel the conversion of a previously recharacterized contribution shouldn't have been a taxable event, my advice would be to look at the lines related to "basis" for the tax year where the recharacterization was reported.

In my case, that meant looking at lines 1-3 and 18-21 of IRA Info Wks and line 14 of Form 8606 for Tax Year 2019  and comparing that information with lines 1 and 12 of IRA Info Wks and line 2 of Form 8606 for Tax Year 2020.  Line 14 of Form 8606 for TY19 should have matched line 2 of Form 8606 for TY20.