Problems with claiming first-time homebuyer expense with Roth IRA and Form 8606

[kanban224]

Hi all. Background - have had a Roth IRA for more than 5 years, am under 59 years old. I took a disbursement from my Roth IRA to buy a home for the first time (yay) but it seems to me like Turbotax isn't properly reducing the Qualified homebuyer expense exception FIRST before subtracting the basis in contributions. I'm incurring a tax penalty as a result, but I don't think I should be. According to form 8606, I believe that the line 20, qualified first-time homebuyer expenses should be subtracted from the distributions before the basis is reduced. Is this a bug?

In the workflow, I've entered my contribution basis (38K) and I took out 44K as a distribution. The qualified first time home buyer expense is 10K max, so it should be 44K - 10K - 38K = no taxable event, right? What am I missing here?

For additional background, this seems to only be a problem when my 1099 is coded in box 7 as "J", but my brokerage says that it's up to me to determine the qualified exceptions so that needs to stay as J.

[ColeenD3]

The ordering is:

You can always withdraw contributions (but not earnings) that you made to your Roth IRA tax and penalty free at anytime. Additionally, the Ordering rules for withdrawals from a Roth IRA are: first from regular contributions, then from Conversion and rollover contributions, on a first-in, first-out basis and finally from Earnings on contributions.

While according to what you have written, you appear to meet the qualifications, you have a code J on your 1099-R. Code J indicates that there was an early distribution from a ROTH IRA.

A qualified distribution from a Roth IRA is tax-free and penalty-free, provided that the five-year aging requirement has been satisfied and one of the following conditions is met:

• Over age 59½
• Death or disability
• Qualified first-time home purchase

Code J means the withdrawal is not qualified. TurboTax should ask you for the amount of contribution and rollovers you made to the account and the amount of previous withdrawals, so the program can tell if you are withdrawing contributions, rollover contributions, or earnings.

[kanban224]

Thanks for helping me with this @ColeenD3 . I think I've done that in the Income section where I entered my 1099 and the Deductions and Credits section where it asks for the Prior Year Roth IRA contributions (which I entered) but I'm still ending up owing a penalty for some reason... When I print out the 8606 it makes it look like it's not taking the qualified homebuyer expense into consideration?

[RobertB4444]

@VolvoGirl has an awesome answer about this one.  Make sure that you follow her steps to enter the exception.

Here's her answer.

[kanban224]

Appreciate it, @RobertB4444  but that didn't work either. I had already filled that section out with the maximum allowed ($10.000) and that didn't do anything for me. It seems like it's still taxing the distribution, even though that 10K should be reducing the amount eligible, based on the exception coming out first. This is according to my interpretation of the step order in Form 8606

[DaveF1006]

It depends. Even if you are eligible for an exception, your distribution is taxable. What the exception does is waive the early withdrawal penalty of the distribution, which is an additional tax that should have no affect on the original distribution amount for 8606 purposes.

[kanban224]

@DaveF1006  I appreciate you weighing in. I think that would be true if I took a larger disbursement with interest that would be taxable, but I don't think that should be a taxable event according to my reading of 8606 and the IRS ordering instructions. According to line 19, 20, 21, I would think the math would go: 44K distribution - 10K homebuyer expense (line 20) = $34K. Of that, my contributions would come out first, which was $38K (line 22). According to line 23, the difference would be zero.

When I do this in TurboTax, line 20 is totally blank on the Form when I look at it using print preview, and thus it's triggering a taxable event...

[DaveF1006]

@kanban224  What you are looking at on the 8606 in part 3 is a calculation performed to determine if there are any earnings in the distribution. For an example, if your distribution was $60,000, your exemption is $10,000 and your basis is $38,000.  Your earnings was $12,000 and there would have been a taxable distribution for $12,000 reported on line 4B on your 1040. Turbo Tax determined there is no taxable distribution and did not populate line 20 because there was no tax consequence. This is because you indicated you met the five year holding period in the federal interview. Even if you hadn't met it, your basis would have been more than the earnings, after the $10K was applied

Your bigger issue is that you have an early withdrawal penalty on $34,000 because you are less than 59 1/2. You can verify this by looking at Schedule 2, part 2, line 8. Check that schedule where I just indicated to see if this is the case. 

Also check your 1040, Line 4B, there should be no taxable amount for your IRA. Check Schedule 2 and your 1040 by:

1. If using Turbo Tax online, go to tax tools>tools>view tax summary>preview my 1040, which is listed in the left pane on your return. Verify there is no amount listed in line 4B on the 1040 and there is an amount on Schedule 2, part 2 line 8.
2. If you are using the software, go to forms mode and look at the 1040 as well as the Schedule 2.

[dmertz]

This is a bug in TurboTax that was introduced with the first release of 2020 TurboTax over a year ago.  Your only option at this time with TurboTax is to use the CD/download version of TurboTax, override Form 8606 line 20 and enter the correct amount of earnings distributed from the Roth IRA to which you are applying to the first-time home purchase.  With the override you'll need to print and mail your tax return.

[kanban224]

@DaveF1006That's exactly the problem here since on my 1040 using the Forms view, there is a taxable amount of 6K, when I don't think there should be. Turbotax is treating this as a taxable event. I shouldn't be incurring the early withdrawal penalty because I took out only contributions and less than 10K of earnings towards the first-time homebuyer exception.

[kanban224]

@dmertzAppreciate you weighing in. Are there any other forms I would need to be careful of besides this and the income tax form? Have developers been alerted to this bug or is there some way of patching it? Seems like this could be a pretty big problem...

[dmertz]

You'll also want to go to Other Tax Situations -> Extra tax on early retirement withdrawals and enter the same $6,000 as exempt from penalty due to the first home purchase.

Between 2013 and 2019 I reported more than 70 TurboTax bugs mostly in the retirement section, around half which were eventually fixed (with the others being mostly uncommon problems that are likely still present), but I no longer have that access and it's almost always an onerous process to get such problems acknowledged by TurboTax Product Quality.  Perhaps @DaveF1006 can report the problem.  A number of users have posted about encountering Roth first-home purchase problem in 2020 and 2021 TurboTax.  (This bug was not present in 2019 TurboTax.)

[DaveF1006]

@kanban224  I worked through the software and experienced the same problem you have. It works fine in the online version but not the software. To continue to report this, I will need to know which version of the software you are using eg: Deluxe, Premier, or Home and Business? 

[kanban224]

@DaveF1006I am working on Deluxe 2021 (CD version). Do you suggest I should just switch to the online version in the short term? Might be a good option sounds like! Thanks for reporting!

[DaveF1006]

You could do that but you have already purchased the CD version. If you do the online version, you will need to pay for the program again.  I don't have a way of providing a free program even though you deserve it. Anyhow, I have reported this issue.