8606 line 10 vs worksheet (Figuring the Taxable Part of Your IRA Distribution) line 7

[yfegade]

IRS form 8606, line 10 calculates fraction based on Total IRA contribution for the tax year PLUS basis in traditional IRA as of end of the previous year MINUS IRA contribution for the tax year made from January 1st till April 15th of the following year.

While, the Worksheet 1-1 (Figuring the Taxable Part of Your IRA Distribution) from IRS publication 590-B, line 7 (https://www.irs.gov/pub/irs-pdf/p590b.pdf, on page 15), calculates the same fraction based only on Total IRA contribution for the tax year PLUS basis in traditional IRA as of end of the previous year. (it does not subtract IRA contribution for the tax year made from January 1st till April 15th of the following year).

Which calculations are correct? If I made, IRA contribution for the tax year between January 1st and April 15th of the following year, then worksheet would produce higher taxes than form 8606. TurboTax seems to be using the worksheet calculation. I think the form 8606 calculations are correct - if I made part of IRA contributions between January 1st and April 15th, then how could I have used those contributions in distribution from IRA in the tax year?

Am I missing something or not understanding it correctly?

[macuser_22]

If worksheet 1-1 is required then the TurboTax 8606 form will have a * (asterisk) next to line 15 and the "Taxable IRA Distribution Smart Worksheet) will be used instead of the 8606 lines 6-15 which is the same as  Pub 590B worksheet 1-1.

Pub 590B says:

Contribution and distribution in the same year. If you
received a distribution in 2019 from a traditional IRA and
you also made contributions to a traditional IRA for 2019
that may not be fully deductible because of the income
limits, you can use Worksheet 1-1 to figure how much of
your 2019 IRA distribution is tax free and how much is taxable.

Worksheet 1-1.

Use only if you made contributions to a traditional IRA for 2019 that may not be fully deductible and have to figure the
taxable part of your 2019 distributions to determine your modified AGI. See Limit if Covered by Employer Plan in
chapter 1 of Pub. 590-A

[yfegade]

Thanks.

On form 8606, I did not see any specific mention that if certain conditions apply then don't user lines 6-12 on form 8606, but use the worksheet instead.

Where does IRS provides guidelines as to when to use the worksheet to do calculations and when to use form 8606 to make calculations?

[macuser_22]

---

@yfegade wrote:

Where does IRS provides guidelines as to when to use the worksheet to do calculations and when to use form 8606 to make calculations?

---

In pub 590B that you posted the link to.

The 590B worksheet 1-1 treats non-deductible contribution make in 2020 *for* 2019 as if they had been made in 2019.    I will note that seems to contradict the 8606 instructions, but it is the IRS worksheet, and has been like that for years.

User @dmertz have you ever found a reason why the IRS 590B worksheet 1-1 seems to do the opposite of the 8606 line 4 statement that says:

Although the contributions to traditional IRAs for 2019 that you made from January 1, 2020, through April 15, 2020, can be treated as nondeductible, they aren’t included in figuring the nontaxable part of any distributions you received in 2019.

[Anonymous]

from 8606 instructions

Line 4
If you made contributions to traditional
IRAs for 2019 in 2019 and 2020 and you
have both deductible and nondeductible
contributions, you can choose to treat
the contributions made in 2019 first as
nondeductible contributions and then as
deductible contributions, or vice versa.
Example. You made contributions
for 2019 of $2,000 in May 2019 and
$2,000 in January 2020, of which
$3,000 are deductible and $1,000 are
nondeductible. You choose $1,000 of
your contribution in 2019 to be
nondeductible. You enter the $1,000 on
line 1, but not line 4, and it becomes
part of your basis for 2019.

Although the contributions to
traditional IRAs for 2019 that you made
from January 1, 2020, through April 15,
2020, can be treated as nondeductible,
they aren’t included in figuring the
nontaxable part of any distributions you
received in 2019.

this makes sense because if all n/d contributions were made after 12/31 any distributions would have had to come out of 2018 IRA's 

lines 6 , 7 and 8 of form 8606 could not and would not include the value of any contributions whether deductible or not that were done after 12/31.

as far as IRS instructions for the form and in the PUB are concerned they actually have no authoritative value.  I believe there is actually a SCOTUS case on this where the taxpayers relied on an IRS pub or instruction.  The IRS said they made a mistake because what they wrote was contrary to the Code and Regs. . SCOTUS ruled in favor of the IRS. 

[dmertz]

The IRS's note for line 4 of Form 8606 is clearly inconsistent with the IRS's calculation on Worksheet 1-1 of IRS Pub 590-B since Worksheet 1-1 includes on line 2 the amount of any contributions made in 2020 for 2019 and treats them as nondeductible.  Because of this, Worksheet 1-1 will always produce a taxable amount that is less than or equal to the amount calculated on Form 8606 (contrary to the assertion in the original question).

It's my belief that TurboTax uses Worksheet 1-1 excessively, including in cases where there is no question that the contribution made in 2020 for 2019 is entirely nondeductible, either because the MAGI would be above the threshold for any of the traditional IRA contribution to be deductible even if AGI was reduced by the entire amount of the traditional IRA contribution for 2019 or because the individual elects to make the entire contribution nondeductible.  In these cases, Worksheet 1-1 is unnecessary.  I believe that Worksheet 1-1 should only be used if the traditional IRA contribution might be only partially deductible, with the deductible amount depending on MAGI.  (I think that the instruction for the use of Worksheet 1-1 should say, "Use only if you made contributions to a traditional IRA for 2019 that may be only partially deductible and have to figure the taxable part of your 2019 distributions to determine your modified AGI.")

[macuser_22]

Right - so which is correct?   They cannot both be.   In searching the internet I found a blog discussing this and someone who seemed to be knowledgeable said that many different tax software (not just TurboTax) were now using worksheet 1-1 exclusively for all calculations for distributions instead of the 8606 and the IRS seemed to be okay with that.  Many of those programs include the worksheet with the filing.

[dmertz]

It seems to me that the instruction for line 4 of Form 8606 applies only if Form 8606 is being used to calculate the nontaxable and taxable amounts, so both are right.  If Worksheet 1-1 is being used, the instruction for Form 8606 line 4 is irrelevant and should be disregarded.

[macuser_22]

My reading of IRC §408(o) says:

(A) In general

The amount of the designated nondeductible contributions made on behalf of any individual for any taxable year shall not exceed the nondeductible limit for such taxable year.

It says *any" taxable year ad defines "designated nondeductible contributions" as" *any* IRA contribution *for* a taxable year.  Nothing says anything about which year the contribution is actually made.

(i) In general

For purposes of this paragraph, the term “designated nondeductible contribution” means any contribution to an individual retirement plan for the taxable year which is designated (in such manner as the Secretary may prescribe) as a contribution for which a deduction is not allowable under section 219.

it then says:

(3) Time when contributions made

In determining for which taxable year a designated nondeductible contribution is made, the rule of section 219(f)(3) shall apply.

219(f)(3)  is the provision to apply a contribution to the previous tax year of made before the due date of the return.

I see nothing that says that the 590B worksheet 1-1 is not correct and the intent of the law is to allow retroactively applying the non-deductible contribution  contributed *in* 2020 *for* 2019 to 2019 for the purpose of calculating 2019 distributions of that contribution.

(The section of the code that deals with the taxation of distributions does not seem to address this at all.)

That might be why many tax software programs started using the worksheet instead of 8606 for doing all the calculations.

The language of the actual law is quite different than the language used by the writers of the 8606 and 590B.

[dmertz]

See section 408(d)(2)(C):

(d) Tax treatment of distributions

(1) In general
Except as otherwise provided in this subsection, any amount paid or distributed out of an individual retirement plan shall be included in gross income by the payee or distributee, as the case may be, in the manner provided under section 72.

(2) Special rules for applying section 72  For purposes of applying section 72 to any amount described in paragraph (1)—

(A) all individual retirement plans shall be treated as 1 contract,

(B) all distributions during any taxable year shall be treated as 1 distribution, and

(C) the value of the contract, income on the contract, and investment in the contract shall be computed as of the close of the calendar year in which the taxable year begins.
For purposes of subparagraph (C), the value of the contract shall be increased by the amount of any distributions during the calendar year.

Note that the investment in the contract shall be computed as of the close of the calendar year in which the taxable year begins.  With respect to IRAs, the investment in the contract is the individual's basis in nondeductible contributions.

Worksheet 1-1 deviates from this as a workaround to a complication not anticipated by the writers of section 408(d)(2)(C).

[macuser_22]

---

@dmertz wrote:

See section 408(d)(2)(C):

Note that the investment in the contract shall be computed as of the close of the calendar year in which the taxable year begins.  With respect to IRAs, the investment in the contract is the individual's basis in nondeductible contributions.

---

Yes, I read the before it made the previous post, but the way I read what I posted is the definition of "designated nondeductible contributions" allows the nondeductible contribution to be part of the prior year so when computing the investment in the contract it is included for that year and treated as if it was in the contract for that year.