Effect of IRA EOY balances on RMD and Social Security taxable amounts; incongruities!

[bobw75087]

Over 30 years using TT (Parsons before it was that) and I cannot figure out what is going on. Initial return showed full refund of all WH, until I entered EOY Balances on 8606 for T-IRAs. Have $52K in SS earnings; $58.8 in RMD distributions; total $138.8K.

Scenarios:

1) w no balances entered, shows $1642 SS taxable.

2) w balance of 1.1 MIL (T) and ZERO (S), shows SS taxable 12.7K and RMD taxable 16.5K (21% of total income).

3) If I change to "actual" balances of 380K (T) and 725K (S) -- which is still 1.1 MIL -- the SS taxable is 42.5K and RMD taxable is 51.6K (68% of total income)!!  

So what is going on??  The amount of income doesn't change, the TOTAL balances are the same; why does the taxable percentage jump from 21% to 68% with no other changes???  Anybody got a clue? I'd like to fix this as my refund of almost 6K completely disappears in Scenario 3. (and we could use it!)  HELP PLEASE!  BobW75087

[dmertz · Accepted solution]

Apparently you have basis in nondeductible traditional IRA contributions.  Until you enter your year-end balance in traditional IRAs, TurboTax assumes that that balance is zero and calculates on Form 8606 an incorrectly high nontaxable amount of the distribution.  Once you enter the correct year-end balance, TurboTax recalculates and produces the correct nontaxable and taxable amounts, appropriately increasing your taxable income.  This increase in ordinary income apparently has also increased the taxable amount of your Social Security income appropriately.

"The amount of income doesn't change"

The amount of taxable income changes when you change the year-end balance entry.  Only with the correct year-end balance entered can TurboTax a correct overall tax liability.  Without the year-end balance entered, the tax liability that TurboTax calculates will be artificially low.