In 2019, I got a 1099-R for an IRA distribution due to a backdoor Roth conversion. Since ALL of the converted funds were from post-taxed contributions, I reported the same amount as my basis on form 8606 so that I wasn't double-taxed. When filing my 2019 return, I also used form 8606 to report an additional post-tax/non-deductible contribution made in the 2020 calendar year but counted toward the 2019 total. This additional amount was NOT converted/distributed to my Roth in 2019, and thus wasn't included in my 2019 1099-R distribution.
The additional contribution was backdoor converted on the same day in 2020 as the contribution (i.e. no growth), and accordingly, I got a 1099-R for 2020 reporting this distribution. Because the financial institution can't know whether this contribution was pre or post tax, they assume the worst case and put the full amount in box 2a (i.e. taxable amount). They ALSO checked 2b (taxable amount not determined), presumably leaving open the possibility that I can account for this being from a post-tax contribution. They used distribution code 2 in box 7, and checked "IRA/SEP/SIMPLE".
When I enter my 1099-R in TurboTax, the federal tax doesn't increase and it says:
"Even though you’re taking money out early, you don’t need to pay a penalty because of your situation."
It doesn't explain the details of the "situation", BUT my Massachusetts tax bill increases by 5% of the distribution (i.e. I'm getting double taxed by Massachusetts). I don't know the reason why it didn't increase my Federal tax, but I suspect it is NOT because it knows that the distribution originated from post-tax funds, or else it wouldn't have increased my Massachusetts tax.
Next, I manually triggered form 8606 and reported my basis as equal to the distributed amount in an attempt to cancel this out. I left the 2020 non-deductible contribution blank/zero because although there was a contribution made in the 2020 calendar year, it was counted toward the 2019 total and already reported on my 2019 form 8606.
Even though I filled out form 8606 for 2020 and reported the "correct" basis equal to the reported distribution, this did not reduce my Massachusetts tax bill to the original amount prior to the entry of the 1099-R.
What am I missing? I paid extra to get help from a Turbo Tax CPA, but he isn't sure what to do either. He is currently researching my case and is confident he will find a resolution, but I am worried.
" I filled out form 8606 for 2020 and reported the "correct" basis equal to the reported distribution,"
that's not permitted, you can't make up a basis that gives you the tax result you want.
if you enter your true basis, and your total value of all IRAs at year end, as required,
the ratio there will determine how much of your distribution is not taxable.
your true basis is from line 14 on your last filed Form 8606, plus any non-deductible contribution for 2020.
Line 14 on last year's 8606 IS basically the amount of the distribution reported on the 2020 1099-R. Actually it is a little bit more because the distribution for THAT year was actually a few dollars lower than the corresponding basis (the account had a few dollars of losses).
Are you saying that I shouldn't need to fill out a new 8606 because I don't have any new contributions that need to be accounted for? If so, TurboTax should already know the correct basis from the 2019 form 8606, but it is STILL double taxing me (at least on the state return). I only tried filling out a 2020 form 8606 as an experiment to help figure out what was going wrong...
correction: Your true basis is from your last filed form 8606 (2019) assuming you didn't report a made up basis in that year also.
As I understand it from other forum posts, MA has a different formula for calculating the taxable amount on an IRA distribution.
I didn't make it up. I reported an after-tax contribution made in 2020 before tax day which was designated toward 2019. The basis on THAT form 8606 was carried over from after tax contributions reported in prior years form 8606, etc.
Can you link to whatever posts talk about the Massachusetts calculation?
I don't know why I'm looking this up for you.
The instructions for MA income tax are readily available to all.
Line 2. Taxable IRA/Keogh, Qualified
Charitable IRA Distributions and Roth IRA Conversion Distributions
Complete the Schedule X, Line 2 Worksheet to
calculate the taxable portion of any amount you
received from an Individual Retirement Account
(IRA), Keogh, qualified charitable IRA distribution
or Roth IRA conversion distribution.
Since Massachusetts does not allow a deduction for amounts
originally contributed to an IRA or Keogh, the distributions are not taxable until the full amount of
your contributions which were previously subject to Massachusetts taxes are recovered.