How to handle 1099-R for Roth IRA Distribution due to exceeding contribution limits

[AndrewQQ]

Double checking on a situation I came across just now for someone whose taxes I am doing. In 2018, individual contributed to their Roth IRA throughout the year but at year end, they were above the limits to do so. So they requested a distribution received in April of last year for the excess amount from Vanguard.

Earlier this year, they received a 2019 1099-R form for this with code P and J in box 7. Gross distribution amount exists (say, $5000) in box 1. There is a small taxable amount (only a few hundred dollars) in box 2A along with both Fed and State withheld amounts in boxes 4 and 12, respectfully. (Even less, only double digits withheld).

TurboTax is saying we need to amend the 2018 return to account for the Gross Distribution (Code P states that on the back of the 1099R) for tax year 2018.  Fine.  So far, so good.

I am not sure then why is the Federal and State withholding amount on the 2019 1099-R being credited to this year's 2019 tax year taxes? We won't get credit for that amount withheld when I amend the 2018 return with the new gross distribution. (The additional $5,000 that needs to be added to the gross income for the 2018 amended 1040-X return we need to file, again according to TurboTax.  So when I amend the 2018 return, I wouldn't be specifying any Fed or State tax withheld, since that was on and credited in the current 2019 return, correct?

Then again, since the Fed and State withholding are indeed credited to 2019, I suppose it is a wash in that department?

Thoughts or explanations? I want to do this correctly.

[macuser_22 · Accepted solution]

Basically it makes no sense to have tax withholding on a return of contribution code "JP" because only the earnings are taxable in the year that the contribution was made, however, any tax withheld can only be reported in the tax year that it was withheld.  Therefore, the tax withheld cannot apply the the taxable earnings in the previous tax year.  It is not possible to withhold tax in 2019 to pay 2018 taxes.

The code P 1099-R must be entered in an amended 2018 tax return  so that the box 2a earnings will be added as taxable 2018 income.  It must also be entered in the 2019 tax return so that the take withheld in 2019 will be applied to 2019 withholding.