Return of Roth excess contributions for 2021

[jeffburger2000]

I had excess IRA contributions and their earnings removed from my Roth account and my wife's and am trying to report these amounts. IRS tells me to simply include the returned amounts on line 4a of 1040 and the taxable amount (the earnings) on 4b. IRS also tells me to not file an 8606 or 1099-R and not to report the tax withheld on the 2021 return; that, I'm told, should be reported next year.

However, in Turbotax, there appears to be no way to directly enter amounts into lines 4a and 4b--those numbers seem to come only from 1099s. So how do I get the proper amounts onto 4a and 4b? And if I do in fact have to create 1099-Rs myself (financial institution won't supply them until next year), what codes should I use to avoid penalties and should I not list the withholding amounts.

FYI, my wife and I are 63 and 72.

Also: I listed $400 of contributions on line 12b, which is within the limits if you're taking a standard deduction. But while TurboTax's 2021 Tax Breakdown (in Federal Review) lists $400 at the amount I entered, it lists $0 as the amount I'm allowed. This appears to be a mistake in the software, as the 1040 does show the $400 being added to the standard deduction.

[ThomasM125]

You would make an entry for a substitute form 1099-R and put the withdrawal amount in box 1 and the earnings in box 2(a). You will see an option to create a substitute form 1099-R on the screen that says Tell Us Which 1099-R You Have when you go to enter the form 1099-R, in the Retirement Plans and Social Security income section of TurboTax, and then IRA, 401(k), Pension Plan Withdrawals (1099-R). Code the substitute form 1099-R as "8" in box 7, for excess contributions plus earnings taxable in 2021.

As long as the $400 contribution is listed on line 12(b) on your form 1040, you are getting credit for your contributions even though you are taking the standard deduction this year.

[jeffburger2000]

Thanks very much. This raises several more questions, though:
1) Is 8 the only code I list in box 7? (Elsewhere I've seen advice to also list J or P, but that would change tax due.)

2) On the 1099-R that I create, do I have to check the box for "Treat as substitute 1099-R and generate a form 4852?
3) Do I have to attach an explanation and, if so, where?

4) Do I have to do anything about this on my New Jersey state return or will everything be pulled in from the federal one?

5) Do I not list withheld state and federal tax on the substitute 1099-R (and instead list those next year? If so, where would I list them then?)

[DanaB27]

You will get a 2022 Form 1099-R  in 2023 with codes P and J for the withdrawal of excess contribution and earnings. This 1099-R will have to be included on your 2021 tax return and you have two options:  

• You can wait until you receive the 1099-R  2022 in 2023 and amend your 2021 return or
• You can report it now in your 2021 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 2022 1099-R into the 2022 tax return since the withholding is reported in the year that the tax was withheld. The 2022 code P will not do anything in 2022 tax return but the withholding will be applied to 2022.

To create a 1099-R in your 2021 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 2021?"
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 the "Which year on Form 1099-R" screen say that this is a 2022 1099-R.
11. Click "Continue" after all 1099-R are entered and answer all the questions.
12. Continue until "Did you use your IRA to pay for any of these expenses?" screen and enter the amount of earnings under "Another reason" if you are over 59 1/2 (if you are under 59 1/2 click "Continue")

Please be aware, code P will say in the drop-down menu "Return of contribution taxable in 2020" you can ignore that since the follow-up question will tell TurboTax that it will be taxable in 2021.

2. No, do not select "Treat as substitute 1099-R and generate a form 4852?". You do not select this since you will be getting the actual Form next year. 

3. TurboTax will create an explanation statement for you.

4. After you enter Form 1099-R you will get a follow-up question for NJ then TurboTax should pull everything to your state return.

5. You do not list any taxes withheld on your 2021 tax return for this Form 1099-R. If you had taxes withheld you will need to enter the 2022 Form 1099-R on your 2022 tax return to get them applied to 2022.

[jeffburger2000]

Thanks for the quick reply. That answered several of my questions but not all:
1) You say enter codes J and P on the 1099 but a previous Turbotax expert and Fidelity both said to enter code 8 ("Return of contribution taxable in 2021"), which seems to better describe this. Which is correct?

2) Turbotax didn't ask me a follow-up question about New Jersey. Whre would I find this on my own in the program?

3) When I file the 1099-R with my 2022 return to get credit for the withheld taxes, would I also again list the amount of the taxable distribution? If I did, wouldn't I get taxed on it again?

Thanks!

[DanaB27]

1. If you made an excess Roth contribution for 2021 and withdrew it in 2022 then your Form 2022 1099-R will have codes P an J because code P on a 2022 Form 1099-R means "Return of contribution taxable in 2021". You would have code 8 and J if you withdrew the 2021 contribution in 2021 but then you should already have the 2021 Form 1099-R for this transaction. If you contributed for 2022 and withdrew it in 2022 your 2022 From 1099-R will have code 8 and J and this would have to be reported on your 2022 tax return.

2. Please verify that you didn't check the IRA/SEP/SIMPLE box and that you enter the NJ state information when you entered Form 1099-R.

3. No, the code P on a 2022 Form 1099-R will not do anything to your 2022 tax return but the withholding will be applied to 2022.

@jeffburger2000

[jeffburger2000]

Thanks very much. I made a 2021 contribution in 2021 and withdrew it in February 2022. I'm reporting that contribution on my 2021 return and understand that I won't receive a 1099-R until 2023. Your reply is helpful but I want to confirm:

1) The 1099-R I created myself for the 2021 return should have code 8 only.

2) While the earnings on the withdrawn money should be reported on this form, the state and federal taxes withheld on those earnings should not be reported until next year.

Are both those statements correct?

[DanaB27]

1. No, you will have to use codes P and J when you create Form 1099-R since you withdrew the excess contribution for 2021 in 2022.

2. Yes the earnings on a 2021 contribution will be taxable in 2021. Yes, if you had federal and state taxes withheld then you will have to enter your 2020 Form 1099-R on your 2022 return to get the taxes applied to 2022.

@jeffburger2000

[jeffburger2000]

OK, re #2, but re the codes: Code 8 says "return of contribution taxable in 2021," which this was. Code P says "return of contribution taxable in 2020," which this wasn't, so why enter Code P?

Also, Code J refers to an "early distribution," which doesn't seem right—this wasn't an early distribution but a return of excess contribution (and without penalty since I'm 72 and also took the money out before filing). 

If you're sure I should enter J and P rather than 8, can you address my confusion above? Many thanks.

[jeffburger2000]

Also, when I enter J and P, Turbotax tells me I'll owe a penalty on the withdrawals, which would not be correct, given my age and the fact that I withdrew before filing.

[DanaB27]

Please be aware that on a 2022 Form 1099-R (which you will get in 2023) code P means "Return of contribution taxable in 2021". If you use 8 on a 2022 Form 1099-R that would make it taxable in 2022 which would be wrong for a 2021 excess contribution removed in 2022.

With code P (and 😎 you can only use code J when it is a Roth IRA. Yes, you do not owe the 10% early withdrawal penalty since you are over 59 1/2. You will enter the amount of earnings under "Another reason" on the "Did you use your IRA to pay for any of these expenses?" screen since you are over 59 1/2 (see step 12 above).

@jeffburger2000

[jeffburger2000]

Thanks. I've got Distribution Codes J and P checked in box 7 as instructed, but a little further down in the form, where it says "If Box 7 code is 2 or 5, check if this distribution is from a Roth IRA," that box is checked and I can't uncheck it even though Box 7 is not code 2 or 5. Is this correct? If not, what should I do?

Also, should I check the box next to "If box code is J or T, check if a qualified distribution"?

[DanaB27]

No, you will not check "If box code is J or T, check if a qualified distribution"? since a return of excess contribution and earnings are not qualified distributions.

You can leave the box "If Box 7 code is 2 or 5, check if this distribution is from a Roth IRA" checked since it is only telling TurboTax that the 1099-R is from a Roth IRA. The code J does the same, so it is just telling TurboTax an additional time.