Traditional IRA 2019 excess contribution

[andind57]

I’ve made an IRA excess contribution for tax year 2019. The excess contribution was done on July 1 2020 (before tax return filing deadline for 2019 tax return). I realized the mistake and got it removed by IRA administrator (FIDELITY) the next day on 2 july 2020. Hence, there were no earnings. I didn't mention about this excess contribution and reversal on 2019 Tax return. FIDELITY has now sent form 5498 and 1099-R 2020.

Please help with following questions:

1. 1099-R 2020 form has Distribution Code 81 in Box 7. Federal income tax withheld (Box 4) is empty. State tax withheld (Box 14) is empty.
2. What should i do with 1099-R? DO i have to amend 2019 Tax return or, use it for Tax year 2020?
3. If i use it in tax return for 2020, Turbo Tax is applying 6% penalty on excess contribution to State Tax. Is this expected?

Thanks for your help.

[DanaB27]

1) The 1099-R with codes 8 and 1 indicates that you removed an 2020 excess contribution in 2020. You might want to double check with your bank if they removed the 2019 excess contribution correctly. You should have gotten a 1099-R with the codes P and 1 since you wanted to remove the 2019 excess contribution and it happened in 2020.

2) If your bank states this is the correct 1099-R with coded 8 and 1 then you will have to include it on your 2020 tax return. You will enter it by following these steps:

1. Login to your TurboTax Account 
2. Click on the Search box on the top and type “1099-R”
3. Click on “Jump to 1099-R”

3) No, you should not have a 6% penalty for excess contribution unless you made 2020 IRA contribution over the limit.

[andind57]

Thanks for clarification on 1 and 2. I have reached out to the bank on #1 for clarification on the tax year and waiting for their response.

On #3,  Turbo Tax Home&Business 2020 windows edition seems to be applying 6% tax on this reversed excess contribution to the NJ state taxes. Federal tax was not affected. This is observed after, I had allowed Turbo Tax to import the 1099-R from the bank. Should i use manual entry of data instead of import?

Thanks for your help.

[ReneeM7122]

Yes, itt might be better to delete the 1099-R and then enter it manually.  Here's how:

How do I view and delete forms in TurboTax Online?

• Open or continue your return in TurboTax.
• In the left menu, select Tax Tools and then Tools.
• In the pop-up window Tool Center, choose Delete a form.
• Select Delete next to the form/schedule/worksheet in the list and follow the instructions.

[andind57]

Thanks for detailed instructions.

I have deleted the imported 1099-R and manually entered the data from the form.

Turbo Tax still applied 6% tax on the reversed excess IRA contribution to NJ state only.

If this 6% tax is not expected, is this an issue with the tax software?

Thanks for the help.

[andind57]

FYI.. the community post Solved: Where on the NJ State Return do you adjust for a withdrawal due to an excess contribution to... suggested to use Forms mode and go to NJ's Pension wks-TP and, check the box that it was not taxable. This step made NJ state to not apply 6% tax on the withdrawn excess contribution.

 Hope the solution is legal and correct.

Thanks.