Excess IRA contribution was fixed before tax date. How do I report this?

[rocket_pony22]

We had a $500 excess IRA/roth contribution in 2022 (due to having multiple accounts) that I just had fixed before the tax filing deadline.  So when I report the amount contributed in for traditional IRA/roths in turbotax for 2022 do I just report the now corrected input numbers?  I had the brokerage withhold the 10% penalty when they fixed it and when I chatted with them they said that a 1099-R gets issued for the the 2023 tax season to show the correction, but they issued a Retail Before Tax ROE Letter with the information that should be sufficient to self report the return of excess on our taxes.  So how to a go about reporting this situation correctly in turbotax for 2022?

[DanaB27]

You can enter the total IRA contributions for 2022 in the IRA contribution interview and then enter the contribution amount removed on the penalty screen (ignore losses and earnings here):

1. Click on "Search" on the top right and type “IRA contributions”
2. Click on “Jump to IRA contributions"
3. Select “Roth IRA”
4. Continue until the penalty screen and enter the excess contribution amount withdrawn

You will get a 2023 Form 1099-R  in 2024 with codes P and J for the withdrawal of excess contributions and earnings. This 1099-R will have to be included on your 2022 tax return and you have two options:  

• You can wait until you receive the 2023 Form 1099-R in 2024 and amend your 2022 return or
• You can report it now in your 2022 return and ignore the 1099-R when it comes unless there is Box 4 Federal Tax withholding and/or Box 14 State withholding. Then you must enter the 2023 Form 1099-R into the 2023 tax return since the withholdings are reported in the year that the tax was withheld. The 2023 code P will not do anything to the 2023 tax return but the withholdings will be applied to 2023.

To create a Form 1099-R in your 2022 return please follow the steps below:

1. Login to your TurboTax Account 
2. Click on the "Search" on the top right and type “1099-R” 
3. Click on “Jump to 1099-R”
4. Answer "Yes" to "Did you get a 1099-R in 2022?"
5. Select "I'll type it in myself"
6. Box 1 enter total distribution (contribution plus earning)
7. Box 2a enter the earnings
8. Box 7 enter J and P
9. Click "Continue"
10. On the "Which year on Form 1099-R" screen say that this is a 2023 Form 1099-R.
11. Click "Continue" after all 1099-R are entered and answer all the questions.
12. Continue until "Did you use your IRA to pay for any of these expenses?" screen and enter the amount of earnings under "Another reason" if you are over 59 1/2 (if you are under 59 1/2 and removed the excess after December 29, 2022, then enter it next to "Corrective Distributions made on or after December 31, 2022")

Please be aware, code P will say in the drop-down menu "Return of contribution taxable in 2021" but you can ignore that since the follow-up question will tell TurboTax that it will be taxable in 2022.

[rocket_pony22]

In my case, the excess contribution of $500 had a loss, so my distribution was only 463.78 (loss of 36.22).  I confirmed with fidelity that no taxes were withheld, so I should be able to input this in my 2022 extended return.  So for box 1 gross distribution is 463.78, box 2a taxable amount is 0 (no earnings). What about box 3 capital gains, do I leave that blank or add the loss of -36.22?  I went back and filled out the overcontribution and confirmed the removal in the tax breaks/IRA contributions section , and it looks like turbo tax is adding the the 6% penalty on that $500, even though everything I've read says there isn't a penalty as long as it was withdrawn in a timely manner before the tax deadline.  Should I enter my IRA contributions as if I didn't over contribute since it was fixed?

[dmertz]

Box 3 of the 1099-R form must remain blank.  Nothing in an IRA is subject to capital-gains treatment.

If TurboTax is presenting a penalty on Form 5329, it appears that you have not properly indicated that you had $500 (not $463.78) of your contribution returned.  From your description it's not clear if the contribution was returned from a Roth IRA or instead from a traditional IRA, so check the Form 5329 itself to see what penalty TurboTax is producing.  Check the TurboTax worksheets related to IRA contributions and limits.

If you enter the contributions as if the $500 was never contributed, this will cause TurboTax to fail to prompt for the required explanation statement describing the return of contribution.