Paying tax on excessive contribution removal

[tdo061803]

Hi

I had been making contribution to Roth IRA while living abroad and taking Foreign Income Exclusion. I realized I shouldn’t have done that after a couple of years.

I filed an excessive contribution removal form with my custodian and took the money out of Roth IRA. I used form[tk] to pay the penalty to IRS. I did it in June after filing my tax return.

This year I received a 1099-R and upon entering it into Turbo tax I was asked to pay tax on the amount I removed.

Box 7 has P. I look up what P is and the mighty Internet gave me this:

Excess contributions plus earnings/excess deferrals (and/or earnings) taxable in 2020.

From my interpretation, it did recognize the amount is an excess contribution, and it’s considering taxable when I remove it.

I know Roth IRA is taxable when one withdraws money from it. In my case, I was correcting an amount that shouldn't have been there in the first place. Why is this amount taxable?

[Mike9241]

you need to enter your basis in the ROTH - the total contributions you made which go on form 8606 - line 22. any earnings are taxable income. 

[tdo061803]

I am not familiar with the forms. Could you please tell me how I should enter it in Turbotax online?

What would be my basis?

[macuser_22]

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@tdo061803 wrote:

Hi

I had been making contribution to Roth IRA while living abroad and taking Foreign Income Exclusion. I realized I shouldn’t have done that after a couple of years.

I filed an excessive contribution removal form with my custodian and took the money out of Roth IRA. I used form[tk] to pay the penalty to IRS. I did it in June after filing my tax return.

This year I received a 1099-R and upon entering it into Turbo tax I was asked to pay tax on the amount I removed.

Box 7 has P. I look up what P is and the mighty Internet gave me this:

Excess contributions plus earnings/excess deferrals (and/or earnings) taxable in 2020.

From my interpretation, it did recognize the amount is an excess contribution, and it’s considering taxable when I remove it.

I know Roth IRA is taxable when one withdraws money from it. In my case, I was correcting an amount that shouldn't have been there in the first place. Why is this amount taxable?

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If the 1099-R was a 2020 1099-R then code P means taxable in  2019.     You must amend 2019 to report it.  Only the amount in box 2a is taxable.    If 2a is zero then nothing is taxable and the 1099-R can be ignored.    If the excess from 2019 was not removed from the IRA contribution section in 2019 and it  carried over into the 2020 software then edit the IRA contribution section and remove it, because it no longer exists.

[tdo061803]

Thank you, @macuser_22!

The 1099-R is for 2020.

The excessive contribution has nothing in box 2a and "Taxable amount not determined" box checked. Box 7: P. Should I ignore entering anything into TurboTax?

The earnings have some amount box 2a. Box 7: PJ. I need to amend the 2019 return to report and pay tax for the earnings, right?

[macuser_22]

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@tdo061803 wrote:

Thank you, @macuser_22!

The 1099-R is for 2020.

The excessive contribution has nothing in box 2a and "Taxable amount not determined" box checked. Box 7: P. Should I ignore entering anything into TurboTax?

The earnings have some amount box 2a. Box 7: PJ. I need to amend the 2019 return to report and pay tax for the earnings, right?

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Are you saying that you have two 1099-R's?

  One with a code P and box 2b checked (is the IRA/SEP/SIMPLE box checked)?

The other with a code PJ and an amount in box 2a?

[tdo061803]

I have one 1099-R with 2 items and I made a big typo. Box7 is J not P

Item 1

Box 1: The excessive contribution

Box 2a: nothing

Box 2b: "Taxable amount not determined" box checked.

IRA/SEP/SIMPLE: nothing

Box 7: J

Was what I did really code J? It appears to be early distribution.

Item 2

Box 1: some amount(I am not sure if it's earnings anymore)

Box 2a: some amount

Box 2b: nothing

Box 4: some amount

IRA/SEP/SIMPLE: nothing

Box 7: PJ

Box 14: some amount

Box 15: state no.

Box 16: some amount

[macuser_22]

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@tdo061803 wrote:

I have one 1099-R with 2 items and I made a big typo. Box7 is J not P

Item 1

Box 1: The excessive contribution

Box 2a: nothing

Box 2b: "Taxable amount not determined" box checked.

IRA/SEP/SIMPLE: nothing

Box 7: J

Was what I did really code J? It appears to be early distribution.

Item 2

Box 1: some amount(I am not sure if it's earnings anymore)

Box 2a: some amount

Box 2b: nothing

Box 4: some amount

IRA/SEP/SIMPLE: nothing

Box 7: PJ

Box 14: some amount

Box 15: state no.

Box 16: some amount

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Those are two totally separate 1099-R's and each must be entered separately.   

The code J is a Roth distribution taxable in 2020 if this is a 2020 1099-R.

The code PJ is a return of Roth contributions taxable in 2019 if this is a 2020 1099-R.    You must amend 2019 to report it.  Only the box 2a amount will be taxable.    The box 4 and 14 tax withheld will apply to 2020 thought so it also must be entered in you 2020 tax return to get credit for tax withheld.   (It makes no sense to have tax withholding on a  return of contribution since the contribution is taxable in the year the contribution was for - 2019, but the tax withholding can only apply to the year that it was withheld - 2020.)

[tdo061803]

Thanks again! 

For Item 1:

Is it possible that code J is not the correct code, and the 1099-R has not taken into account of the distribution is an excessive contribution removal?

For Item2: 

Okay I need to enter it in 2020 return and amend 2019 return. 

Did you mean:

On 2020, I enter what's in box 4 - 14

On 2019 amendment, I enter what's in box 2a

[macuser_22 · Accepted solution]

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@tdo061803 wrote:

Thanks again! 

For Item 1:

Is it possible that code J is not the correct code, and the 1099-R has not taken into account of the distribution is an excessive contribution removal?

For Item2: 

Okay I need to enter it in 2020 return and amend 2019 return. 

Did you mean:

On 2020, I enter what's in box 4 - 14

On 2019 amendment, I enter what's in box 2a

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#1)  Code J is a normal distribution and has nothing to do with a return of contribution.      It hat is not correct then contact the issuer of the 1099-R.

#2)  Enter the entire 1099-R into both 2019 and 2020.  TurboTax knows to ignore the tax withholding in 2019 for a code PJ  and to only apply the withholding for 2020.