1099-R and turbo tax not accounting for Fed tax already withheld

[meganstilwell]

I want to make sure I am filing this correctly. We are married filed jointly and in the 22% bracket. My husband moved all of his traditional IRAs over to a Roth IRA. We got a 1099-r and the filing prompts on turbotax are confusing me .The gross distribution and taxable amount are the same (~55,000), taxable amount not determined and total distribution boxes are checked. Capital gain is 0. Federal income tax withheld is around $7000. Distribution code is 2 and IRA/SEP/SIMPLE box is checked. Also state taxes withheld are around 1700. Everything else is a 0. So we already paid ~15% taxes for this.  It also says after I enter the 1099 that we do not need to pay extra taxes on this on the next turbotax screen.  However, it continues with more prompts and no it is not inherited and no its not from employer SEP. If I check the box that he did a combination of rolling over, and converting it takes away ~$12,000 from our return. If I click he rolled over all his money and then say he added the 8,700 (taxes withheld from by bank on our behalf from the original distribution) of his own money, and only ~$46,600 was rolled over, then our tax credit is only affected slightly. I assumed that since its traditional to Roth I would pick the converting option and since we already paid some taxes I would never expect to owe $12,000 more.  Did I do this right by picking the rolled over, or am I missing something?

[VolvoGirl]

It was hard to follow that.   But you did not do a rollover.  It was all a conversion.   The extra taxes it said you didn’t have to pay was for the 10% Early Withdrawal Penalty.  

You didn’t actually pay the tax or the 10% penalty (you pay a 10% early withdrawal penalty if you are under 59 ½). You had taxes withheld like from your paycheck. You still have to enter the whole gross amount (before taxes were withheld) with your other income to figure out the total tax (and it may put you into a higher tax bracket) and then the withholding is subtracted from the total tax to figure your refund or tax due. The Gross amount shows up on 1040 line 4a or 5a and the taxable amount on 4b/5b.  You will get credit for the withholding on 1040 line 25b.

 @dmertz 

[dmertz]

The Form 1099-R provided by the payer is actually incorrect.  You should have received a code-2 Form 1099-R for the portion that was actually converted to Roth and a separate code-1 Form 1099-R for the portion withheld for taxes.  The portion withheld for taxes does not escape the 10% early-distribution penalty unless you substitute other funds to indirectly complete either rollover to a traditional IRA or a conversion to a Roth IRA.  Assuming that no such substitution was done, by the payer incorrectly using code 2 to report the portion withheld for taxes, your tax return will fail to appropriately include the 10% penalty on the $7,000.

$12,000 would be about the right taxable amount for someone in the 22% tax bracket.  As VolvoGirl said, The $7,000 withheld for taxes would be credited on line 25b of your Form 1040, so that $7,000 is insufficient to cover all of the increase in your tax liability resulting from the gross amount of this distribution.  By falsely indicating that all of the distribution was rolled over, all $55,000 is inappropriately removed from your taxable income.