earned income vs taxable income

[rtgis0409991]

I may have contributed an excess to my Roth IRA in 2021.

As I understand it, the max I can contribute is the lesser of my earned income or $6000.

(I don't come close to the max threshold MAGI of $125,000.)

I started my TurboTax return for 2021 and my AGI is ~$9000 from a taxable grant for a summer research intern position at the NIH (reported on a 1099-G, Box 6). That is the extent of my earnings/income for 2021.

Just curious: is this grant considered earned income or unearned/passive income since it is a grant? I was not considered an employee of the NIH hence no W-2, but nor was I considered self employed. 

My taxable income was calculated to be $0. I guess after the standard deduction this reduced my taxable income to $0? I am 22 yrs old filing as single person.

So is taxable income the same as earned income and since my taxable income is $0, my max Roth IRA contribution is $0 for 2021. I contributed $6000 to my Roth for 2021 so if earned income=taxable income, then I had an excess contribution of $6000, but again the question is does earned income =taxable income??

@dmertz 

[PattiF]

The Roth IRA contribution is based on your adjusted gross income, not your taxable income. This amount is found on Line 11 of Form 1040. 

The income from the taxable grant for the research intern position at the NIH is considered earned income. Earned income also includes any part of a scholarship or fellowship grant that is considered gross income. See IRS Publication 17 on page 76 in the left column under Payment for services.

You can contribute to the Roth IRA.

[dmertz]

AGI (MAGI) is only relevant to the threshold above which you are ineligible to make a Roth IRA contribution.  Assuming that you are not married filing separately, you are far below that threshold and AGI is therefore irrelevant.  Provided you have compensation, you can make a Roth IRA contribution.

Assuming that you are an eligible individual, your Roth IRA contribution is limited to your compensation.  The SECURE Act made certain taxable non-tuition fellowship stipends be considered to be compensation for the purpose of an IRA.  Generally this would include the amount on line 1 of Form 1040 with the SCH notation.

[rtgis0409991]

Thank you. 

I do understand that AGI (MAGI) is only relevant to the threshold above which I am ineligible to make a Roth IRA contribution.  I am a single 22 yr old grad student, so I am filing as a single, and yes I understand that am far below that threshold and AGI is therefore irrelevant.  

However, the issue is that even though my AGI was ~$9000, my taxable income was $0 (I guess after deductions and such).  

As I understand it, the max Roth contribution is the lesser of my earned income OR $6000? 

So my confusion is what is considered "earned income" : my AGI, my total income, or my taxable income? "Earned Income" is not an entry line on Form 1040.

Form 1040 only has total income (Line 9),  AGI (Line 11) , and taxable income (Line 15) listed. 

So is taxable income the same as earned income and since my taxable income is $0, my max Roth IRA contribution is $0 for 2021. I contributed $6000 to my Roth for 2021 so if earned income=taxable income, then I had an excess contribution of $6000, but again the question is does earned income =taxable income??

Thanks.

@dmertz 

[rtgis0409991]

I believe I found the answer to my previous question: earned income is the same as taxable income, at least with my situation. So I did have an excess Roth IRA contribution of $6000 for 2021.

I called the IRA custodian today and had the $6000 removed along with the ~$600 in earnings. I understand I have to pay taxes at my normal tax rate on the earnings and possibly a 10% penalty on the earnings b/c I am <59.5 yrs old. 

 I want to remedy this situation now/this year instead of waiting til 2023 when I get my 1099-R for the excess contribution, but I am not sure how to do it in TT. 

I know you are not a paid tax consultant and do answer questions for free, so I want to be respectful of your time. Would you mind answering a few questions for me? I will keep it as brief and focused as possible. Thank you in advance.

1. Should I edit my 2021 tax return now letting the IRS know I withdrew the excess Roth contribution or do I have to wait til 2023 for the 1099-R? I know I am not taxed on the returned excess contribution, but I am taxed on the earnings.

2. If it’s possible (and even recommended) to edit my current tax return now, since I withdrew the excess contribution/earnings before the tax filing deadline of 4-18-22, does the IRA treat the excess contribution as though it never happened and no 6% penalty will apply? (I haven't filed my 2021 return and caught the situation before I submitted my return so this is not an amended tax return, but instead just an edited return)

*If so, do I enter the corrected Roth IRA contribution amount of $0 (my original contribution amount of $6000 minus the excess contribution that I withdrew of $6000=$0). Do I enter $0 when TT asks about any “prior year excess contribution”? 
**So, is it as simple as entering $0 for my Roth IRA contribution for 2021 when TT asks how much I contributed to my Roth in 2021?  

If so, then I assume Form 5329 would not be generated by TT b/c there is no excess contribution to have me pay the 6% tax on the excess contribution?  

3.  THIS IS MY BIG QUESTION:

How/where do I enter the taxable earnings (the earnings on the excess Roth contribution) in TurboTax? TT does not prompt me to enter the earnings at all. 

I have read that the earnings are taxable in the year I actually made the contribution, not in the year I withdrew it, so the earnings are taxable in 2021 and therefore the earnings should somehow/somewhere be included in my 2021 tax return and I should not wait to report the earnings til 2023 in my 2022 tax return? Is this true?  

*If I do need to report the earnings I gained on the Roth excess contribution, do I enter the excess distribution/earnings on Form 1040 Lines 4a and 4b?
 Or is that only if I received a 1099-R (which again I won’t til Jan 2023) or if yes, I do indeed enter the earnings on Line 4a and 4b, do I need to make a substitute/dummy 1099-R?     
If it is not wise to create a dummy 1099-R if I report the earnings in my 2021 return, is there somewhere to explain the situation (I know there is an area to explain on the amended 1040-X form, but I haven't filed yet and want to avoid having to file an amended 2021 return now and/or in 2023)? 

I feel like it will be confusing to the IRS if I say I contributed $0 to my Roth in 2021 (which is now true since I withdrew the $6000 excess contribution on March 22, 2022, but yet I have taxable earnings from my excess Roth contribution withdrawal for 2021? Isn’t the IRS going to ask where the taxable earnings came from if  “my Roth contribution was $0 in 2021”)?

If I don't enter the earnings in Form 1040 Lines 4a/4b, do I enter the earnings in Form 1040, Lines 8 (“other income from schedule 1, Line 10”) or 10 (“adjustments to income from Schedule 1, line 26”)?

Or somewhere else? 

It seems like no matter where I have to enter the earnings, I will have to go to 'Forms' and manually input the numbers in the boxes by right clicking and overriding? 

4. My effective tax rate is zero (b/c my taxable income is zero), but based on with my AGI= ~$9000 that puts me in the 10% tax bracket, so what tax rate is used for my earnings on the excess contribution (0% or 10%) ?

5. Or do I not report the taxable earnings in my 2021 return b/c I won’t receive my 1099-R til Jan 2023 and should just wait to report the earnings in my 2022 return and pay taxes then?

6. If I remedy the situation now, do I still have to file an amended 2021 return in 2023 once I get the 1099-R? Or can I just ignore the 1099-R in 2023 b/c I dealt with the issue this year?

7. Are there exceptions to the 10% penalty on earnings for early w/drawal? (ie, since I had the excess contribution/earnings withdrawn to comply with the rules of Roth IRA max contributions is there an exception in this case that would make the earnings on the excess contributions be exempt from the 10% penalty??)

Thanks!

@dmertz 

[DanaB27]

1. Yes, the earnings are taxable and subject to the 10% early withdrawal penalty since you are under 59 1/2.

2. Yes, you will enter $0 when TurboTax asks about any “prior year excess contribution”.  After you entered your Roth contribution you will get a penalty and have the option to enter the $6,000 withdrawn by the due date. Then TurboTax will not calculate the 6% penalty.

3, 5, and 6: You will get a 1099-R 2022 in 2023 with codes J and P for the withdrawal of excess contribution and earnings. This 1099-R will have to be included on your 2021 tax return and you have two options: 

• You can wait until you receive the 1099-R  2022 in 2023 and amend your 2021 return or
• You can report it now in your 2021 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 2022 1099-R into the 2022 tax return since the withholding is reported in the year that the tax was withheld. The 2022 code P will not do anything in 2022 tax return but the withholding will be applied to 2022.

To create a 1099-R in your 2021 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 2021?"
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 2022 1099-R.
11. Click "Continue" after all 1099-R are entered and answer all the questions.

Please be aware, code P will say in the drop-down menu "Return of contribution taxable in 2020" you can ignore that since the follow-up question will tell TurboTax that it will be taxable in 2021.

4. If your AGI is $9,000 and you add the $600 earnings but you have a standard deduction of $12,550 as a single then you will still have a taxable income of $0. Therefore, you will only pay the 10% penalty on the earnings ($60).

7. There are exceptions to the 10% but none that apply in your case. Please see IRS Exceptions to Tax on Early Distributions for details.

@rtgis0409991

[dmertz]

First, the tax code refers to 'compensation' rather than 'earned income' to be clear on what is required to be able to contribute to an IRA.  'Earned income' is less precise since investment gains are sometimes referred to as 'earnings' (which would not be compensation).  The term 'compensation' is generally defined as being pay for work.  The tax code was modified by the SECURE Act to also say, ‘‘The term ‘compensation’ shall include any amount which is included in the individual’s gross income and paid to the individual to aid the individual in the pursuit of graduate or postdoctoral study.’’

1.  Since you haven't already filed your 2021 tax return, you can enter the anticipated (dummy) code JP 2022 Form 1099-R as if you have already received it, otherwise you would need to file with Form 5329 showing the $360 penalty and then amend next year to claim a refund of the $360 when you receive the Form 1099-R.

2.  Since it's been removed, the contribution is treated as having not been made.  If the Roth IRA contribution made for 2021 was your first, your prior-year contributions is $0.  In TurboTax you'll indicate that you made a $6,000 contribution and then indicate that you had $6,000 returned.  This will cause TurboTax to prompt you for the required explanation statement.  In 2021 TurboTax, prior-year excess contributions means contributions made for years before 2021.

3.  The taxable earnings are entered when you enter the code JP 2022 Form 1099-R into 2021 TurboTax and indicate that it's a 2022 Form 1099-R.  TurboTax will include on Form 1040 line 4b the amount from box 2a of the Form 1099-R.  TurboTax will also include this amount as an early-distribution on Form 5329 Part I if you are under age 59½, which I'm guessing is the case, resulting in some tax liability for 2021.

4.  Unless you had at least about $3,000 of taxable earnings, your AGI will still be below the standard deduction amount, resulting in taxable income remaining zero.

5.  N/A

6.  If you submit your tax return now by entering the Form 1099-R as if you have already received it, you can ignore the actual Form 1099-R when you receive it unless it's different that was you anticipated or it shows tax withholding.  (Tax withholding on a return of contribution usually doesn't make sense.)  If there is tax withholding, the 2022 Form 1099-R must be entered into 2022 TurboTax to get credit for the withholding even though that taxable amount shown on the form is taxable on your 2021 tax return.

7.  The exceptions to the early-distribution penalty are the same as for any early distribution from an IRA:

https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-tax-on-early-distri...

[Sharon carrell]

I need to know what amount was on line 11 on my 2021 tax return so I can file 2022

[DoninGA]

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@Sharon carrell wrote:

I need to know what amount was on line 11 on my 2021 tax return so I can file 2022

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