Stuck! 1099-R Taxable income should not be zero

[anadkarni]

I had an excess contribution of $3157 in my Roth IRA for year 2021. I had my financial institution recharacterize it to a Traditional IRA in 2022 before the tax deadline.

I received 2 1099-Rs. The Roth IRA 1099-R Box 7 has Code R. The Traditional IRA 1099-R Box 7 has Code 2. Box 2b Taxable amount not determined box is checked.

At the review step I get an error: "Taxable amount should not be zero if there is no prior year excess traditional IRA contribution on line 4 of the IRA Information Worksheet."

Since all my contributions were non-deductible and done with after tax fund, my taxable income should be $0. Turbotax wont let me enter $0 for box 2a in my Traditional IRA 1099-R

Please help! Thanks!

[DanaB27]

No, please enter Form 1099-R with code 2 as shown on the form. Do not make changes to it.

You can ignore Form 1099-R with code R for the recharacterization since it won't do anything to your return. You should have reported the recharacterization on your 2021 tax return with the steps below:

1. Open your return
2. Click “Deductions &Credits” on the top
3. Click "I'll choose what to work on"
4. Scroll down to “Traditional and Roth IRA Contributions” and click “Start”
5. Select “Roth IRA”
6. Answer “No” to “Is This a Repayment of a Retirement Distribution
7. Enter the Roth contribution amount 
8. Answer “Yes” to the recharacterized question on the “Switch from a Roth To a Traditional IRA?” screen and enter the contribution amount (no earnings or losses) on the next screen.
9. TurboTax will ask for an explanation statement where it should be stated that the original $xxx.xx plus $xxx.xx earnings (or loss) were recharacterized.
10. On the screen "Choose Not to Deduct IRA Contributions" answer "Yes" (since you are doing a backdoor Roth. If you have a retirement plan at work and are over the income limit it will be nondeductible automatically and you only get a warning and then a screen saying $0 is deductible)

You will have a basis on line 14 of your 2021 Form 8606 which needs to be entered on your 2022 tax return when you enter your conversion (Form 1099-R with code 2):

1. Click "Federal Taxes" on the top and select "Wages & Income"
2. Click "I'll choose what to work on"
3. Scroll down and click "Start" next to "IRA, 401(k), Pension Plan (1099-R)" 
4. Answer "Yes" to the question "Did You Have Any of These Types of Income?"
5. Click "I'll Type it Myself"
6. Choose "Form 1099-R, Withdrawal of Money from 401(k) Retirement Plans, Pensions, IRAs, etc."
7. Click "Continue" and enter the information from your 1099-R
8. Answer questions until you get to “What Did You Do With The Money” and choose “I moved it to another retirement account”
9. Then choose “I did a combination of rolling over, converting, or cashing out money.” and enter the amount next to "Amount converted to a Roth IRA account"
10. On the "Your 1099-R Entries" screen click "continue"
11. Answer "yes" to "Any nondeductible Contribution to your IRA?" if you had any nondeductible contributions in prior years.
12. Answer the questions about the basis from line 14 of your 2021 Form 8606 and the value of all traditional, SEP, and SIMPLE IRAs

[anadkarni]

Hello DanaB27,

Thank you for taking the time to read my question and reply.

I should have been more clear with my post. I had reported the recharacterization for the year 2021 when I filed it last year using TurboTax.

I will go into more detail chronologically:

1) In March 2022, I find out I contributed excess of $3157 to my Roth IRA. I had it recharacterized to a Traditional IRA. Which I then converted back to my Roth IRA. My Tax 2021 form 8606 has basis of $3157

2) In May 2022, I also contribute $6000 to my Traditional IRA for year 2022 and have it backdoored to Roth IRA.

For 2022 taxes,  when I go through the steps, Turbotax treats the $3157 as retirement income. Which is not right. All of $3157 are after-tax funds and were recharacterized (8606 basis), then converted. I am struggling to find out why the system is treating the all funds as retirement income.

Best,

Advait

[DanaB27]

Yes, you will have to enter the $3,157 basis from your 2021 Form 8606 line 14 during the interview. You can either enter it when you enter your $6,000 nondeductible contribution for 2022 (steps 9 and 10) or when you enter your Form 1099-R for the conversion (steps 11 and 12).

To enter the nondeductible contribution to the traditional IRA:

1. Open your return
2. Click “Deductions &Credits” on the top
3. Click "I'll choose what to work on"
4. Scroll down to “Traditional and Roth IRA Contributions” and click “Start”
5. Select “traditional IRA”
6. Answer “No” to “Is This a Repayment of a Retirement Distribution?”
7. Enter the amount you contributed
8. Answer “No” to the recharacterized question on the “Did You Change Your Mind?” screen
9. Answer the next questions until you get to “Any Nondeductible Contributions to Your IRA?” and select “Yes” if you had nondeductible contributions before this tax year
10. Enter your basis in the Traditional IRA from your 2021 Form 8606 line 14 (if you had a basis in the prior year)
11. On the “Choose Not to Deduct IRA Contributions” screen choose “Yes, make part of my IRA contribution nondeductible” and enter the amount (if you have a retirement plan at work and are over the income limit it will be nondeductible automatically and you only get a warning and then a screen saying $0 is deductible).

To enter the 1099-R conversion: 

1. Click "Federal Taxes" on the top and select "Wages & Income"
2. Click "I'll choose what to work on"
3. Scroll down and click "Start" next to "IRA, 401(k), Pension Plan (1099-R)" 
4. Answer "Yes" to the question "Did You Have Any of These Types of Income?"
5. Click "I'll Type it Myself"
6. Choose "Form 1099-R, Withdrawal of Money from 401(k) Retirement Plans, Pensions, IRAs, etc."
7. Click "Continue" and enter the information from your 1099-R
8. Answer questions until you get to “What Did You Do With The Money” and choose “I moved it to another retirement account”
9. Then choose “I did a combination of rolling over, converting, or cashing out money.” and enter the amount next to "Amount converted to a Roth IRA account"
10. On the "Your 1099-R Entries" screen click "continue"
11. Answer "yes" to "Any nondeductible Contribution to your IRA?" if you had any nondeductible contributions in prior years.
12. Answer the questions about the basis from line 14 of your 2021 Form 8606 and the value of all traditional, SEP, and SIMPLE IRAs

@anadkarni