Too Much contributed to Roth even before Interest?

[taxruler]

Let's say I made 7000 in 2024 as self-employed, not counting any interest earned. Turbotax seems to show this amount as both gross, net income. Then, when I enter that I contributed 7000 to my Roth in 2024, why would it say I contributed too much? It's reason seems to be that earned income was only 6505, but why? If I took 0 deductions, is it the earned income tax credit that's doing it? I don't understand how it's 6505, or how I'd know I can only contribute 6505, or what to do if all contributed dollars are already invested within the Roth?
Also, I initially wasn't going to mention contributions to Roth, because it was under deductions, which is a waste of time since it always says I should take the SALT. So what if I never filled out the Roth contribution info? I thought deductions are only optional, for my benefit, but now it seems not filling it out could lead to not realizing I made an excess contribution to my Roth? What would happen if I never filled out the Roth stuff? 
Is there other important stuff in there I must fill out?

[DanaB27]

You need  taxable compensations to make IRA contributions. Since you are self-employed your taxable compensation is your net profit (line 3 of Schedule 1) reduced by 

• The deduction for contributions made on your behalf to retirement plans (line 16 of Schedule 1), and
• The deduction allowed for the deductible part of your self-employment taxes (line 15 of Schedule 1).

You aren't required to report Roth IRA contributions but generally it helps to enter it since it will let you know if you have an excess Roth IRA contribution. Also, IRA contributions sometimes can qualify you for Retirement Savings Contributions Credit. 

Excess contributions are taxed at 6% per year for each year the excess amounts remain in the IRA. You will need to request the withdrawal of an excess Roth IRA contribution plus earnings with your financial institution by the due date to avoid the 6% penalty. The earnings will be taxable in the year the contribution was made.

If you made an excess contribution in 2024 and withdrew the 2024 excess Roth IRA contribution plus earnings in 2025 before the due date, then you will get a 2025 Form 1099-R in 2026 with codes P and J. This 1099-R will have to be included on your 2024 tax return and you have two options:  

• You can wait until you receive the 2025 Form 1099-R in 2026 and amend your 2024 return or
• You can report it now in your 2024 return and ignore the 1099-R when it comes unless there is Box 4 Federal Tax withholding and/or Box 14 State withholding. Then you must enter the 2025 Form 1099-R into the 2025 tax return since the withholdings are reported in the year that the tax was withheld. The 2025 code P will not do anything to your income to the 2025 tax return income but the withholdings will be applied to 2025.

To create a Form 1099-R in your 2024 return please follow the steps below:

1. Login to your TurboTax Account 
2. Click on the "Search" on the top right and type “1099-R” 
3. Click on “Jump to 1099-R”
4. Answer "Yes" to "Did you get a 1099-R in 2024?"
5. Select "I'll type it in myself"
6. Box 1 enter total distribution (contribution plus earning)
7. Box 2a enter the earnings
8. Box 7 enter J and P
9. Click "Continue"
10. On "Is the IRA/SEP/SIMPLE box on this 1099-R checked?" screen answer "No, the box is blank"?
11. On the "Which year on Form 1099-R" screen say that this is a 2025 Form 1099-R.
12. Click "Continue" after all 1099-R are entered and answer all the questions.
13. Continue until "Did you use your IRA to pay for any of these expenses?" screen and enter the amount of earnings under "Corrective distributions made before the due date of the return".

Please be aware, code P will say in the drop-down menu "Return of contribution taxable in 2023" but you can ignore that since the follow-up question will tell TurboTax that it will be taxable in 2024.

Also, you want to indicate in the IRA contribution interview that you removed the excess contribution to avoid the 6% penalty:

1. Click on "Search" on the top right and type “IRA contributions”
2. Click on “Jump to IRA contributions"
3. Select “Roth IRA”
4. Continue until the penalty screen and enter the excess contribution amount withdrawn.

[dmertz]

Your IRA contribution is not permitted to exceed net earnings.  Net earnings are net profit minus the deductible portion of self-employment taxes.  With $7,000 of net profit, the deduction for SE tax is $495, so your net earnings are only $6,505.  Anything contributed beyond $6,505 is therefore an excess contribution subject to penalty unless corrected by obtaining an explicit return of contribution before the due date of your tax return, including extensions.

[taxruler]

I suspected it was something like that, but I'm confused because it never happened before. I remember previously it was like, 6k made, 6k contributed to Roth, 6K allowed as the limit all ok.  I think that happened for several years including last year. So how is it possible that it changed?

Also, the Earned Income credit shows as 499 when I enter income of 7k. So how they arrive at 6505 as the earned amount, resulting in excess contribution of 495?

Also, if 7k is the limit for a Roth contribution for 2024, when you made 7k exactly that year, how would anyone know to contribute 495 less before filing taxes?

If you already contributed 7k to your Roth, the investment was spread to a couple of stocks that lost significantly, do you have to sell the stocks at a loss to take the excess contribution out? Does it have to be the exact stocks you bought too?

What if you file taxes while requesting SALT, you don't bother with deductions, then would you get a surprise letter in the mail demanding you pay 6% penalty on the excess contribution within 30 days, or something?

I just spent like 4 hours on the phone with Turbotax to find a solution, but failed. So good answers would greatly be appreciated. We tested adding more income, with results solving the problem, by adding chump change. The problem is, even if I remember better to find out that I did indeed earn that chump change, it probably didn't leave a paper trail, plus I think I didn't report it when filing LA City business taxes, even though I'm sure reporting it with LA would've made 0 difference with LA. So would you include the chump change (not even 1k) on Turbotax to solve the problem?

P.S Does this mean I can't skip things in Turbotax, like the deductions section, even if I take SALT, because it can backfire, like how I almost missed this Roth issue?

What does level 15 mean? You're smart on this stuff?
Thanks.