How to enter a 1099-R with Distribution Code P?

[aeroknight]

In 2018 I contributed $5500 to a Tradition IRA. I did not realize it at the time that I was not eligible to make this contribution in that year and all of it would be excess contribution.

When I realized it would not be deductible, I asked the custodian to return the entire excess contribution of $5,500.

They promptly calculated the earnings and refunded the amount of $5,293.02. My earnings were negative because the contribution actually lost value during 2018. The excess contribution and earnings were returned in January 2019 (well before the due date of my 2018 return). On my 2018 return I did not show any IRA contribution because the entire contribution was reversed before the tax filling date.

The custodian did not issue me a 2018 1099-R, instead they have issued me a 2019 1099-R with a P distribution code (P--Excess contributions plus earnings/excess deferrals (and/or earnings) taxable in 2018).

The 1099-R shows Gross Distribution (Box 1) of $5,293.02 and Taxable Amount (Box 2a) is blank. At the same time Taxable amount not determined (2b) is checked. This is actually not true, the custodian knows the earnings were ($206.98) but I think its easier for them to check 2b, leave 2a empty and be done with it. Also, I read somewhere that the IRS guidance doesn't allow a negative number to be reported on the 1099-R.

How do I enter this form into my amended turbo tax 2018 return? When I enter the gross distribution without a taxable amount it treats the entire amount as taxable which I don't think it should. I did not claim any deduction for the contribution so only the tax on the earnings should have any bearing to my 2018 return.

If I had any earnings on this excess contribution, I would have to pay tax just on that amount. Since I have a loss, shouldn't just that amount be deducted from my earnings of 2018 and reduce my tax bill?

Any guidance anyone can offer will be appreciated.

[SusanY1]

You enter this 1099 on your 2019 return, you do not need to amend the 2018 return.  While it was related to the 2018 tax year, the transaction itself (return of the contribution) occurred in 2019 so that is when it is reported. 

The Code P tells TurboTax and the IRS that it was related to 2018, and is not taxable.  It should not change your refund or balance due once you have entered in the Code P and all of the relevant data. 

The "taxable amount not determined" box is typically checked for distributions of this nature as the custodian does not know about any other transactions you may have, and it simply means that the custodian is not assuming responsibility for determining the taxable amount (which they may do in certain other types of distributions reported on this same form such as certain types of pension distributions.)  This is normal and also doesn't affect the taxation.

Box 2a should be blank on the form and in TurboTax since the transaction is not taxable - this is the correct way for the form to be reported to you. 

Enter the form into 2019 software exactly as it appears so that it will match in the IRS database.  It will not cause your tax to increase.  

[macuser_22]

The 1099-R is correct.   A 2019 code P entered into 2018 will ask what year the 1099-R is for - choose 2019.  Since there are no earnings in box 2a, there will be no tax added to line 4b on the 1040 form.

[aeroknight]

Thank you @SusanY1 & @macuser_22  for your responses

When I follow @SusanY1's post, I can confirm no taxable income is added to my 2019 return when I correctly enter the 1099-R with all the codes and relevant data but Turbo Tax does throw up a warning saying my 2018 return may need to be amended.

When I enter the 1099-R into my 2018 return, @macuser_22 is correct that it adds no taxable income to box 4b even though the distribution (Box 1) is shown in 4a.

I have a couple of follow up questions:

1. Can I safely ignore turbotax's warning that my 2018 return may need to be amended? From what I can tell, even if I did amend the 2018 return based on this 1099-R, the tax owed wouldn't change. The only thing that would change is box 4a on form 1040.

2. This is more a theoretical question because I am curious: If I had any earnings or interest on this excess contribution, I would have to pay tax on the earnings. Since I have a loss, shouldn't the loss be deducted from my earnings of 2018 (or 2019) and reduce my tax bill?

Thanks.

[macuser_22]

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@aeroknight wrote:

When I enter the 1099-R into my 2018 return, @macuser_22 is correct that it adds no taxable income to box 4b even though the distribution (Box 1) is shown in 4a.

I have a couple of follow up questions:

1. Can I safely ignore turbotax's warning that my 2018 return may need to be amended? From what I can tell, even if I did amend the 2018 return based on this 1099-R, the tax owed wouldn't change. The only thing that would change is box 4a on form 1040.

2. This is more a theoretical question because I am curious: If I had any earnings or interest on this excess contribution, I would have to pay tax on the earnings. Since I have a loss, shouldn't the loss be deducted from my earnings of 2018 (or 2019) and reduce my tax bill?

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 #1)  No you cannot ignore the warning because a code 2019 code P does NOTHING when entered into TurboTax 2018 other the  to tell you to amend 2018 where the 1099-R is actually entered.

#2)  Since there was a loss, then it will not affect your 2018 tax at all (as you found out) and is not worth amending for just to add the 1099-R box 1 amount to the 1040 line 4a to let the IRS know that you have reported it - I doubt the IRS will ever question the missing line 4a amount on your 2018 tax return.

#3) Losses in a IRA are not deductible.