Tax liability increases after entering 1099-R (Backdoor Roth Conversion)

[User2698470]

Hello,

I could use some help entering our 1099-Rs. We exceed the Roth IRA income limits, so we do a Backdoor Roth conversion. My understanding is was that if you exceed income limits, you could fund a Traditional IRA with up to $6500 per person, and then convert to a Roth IRA to circumvent the income limits. 

When TurboTax downloaded the 1099-Rs from Fidelity, our tax liability when from a <$200 to almost $2K. I think the $20k+ we converted to Roth IRA it's being taxed as a distribution.

My wife 1099-R shows in box 1 a Gross Distribution of $12,513,47, and it shows the same amount in box 2A (taxable amount). In 2023, my wife funded her IRA with $5500 for the 2022 tax year, and $6500 for the 2023. I don't know where the $513.47 difference is coming from (gains maybe?).

My 1099-R shows in box 1 a Gross Distribution of $7,954.59, and it shows the same amount in box 2A (taxable amount). In 2023, I funded her IRA with $1452.7 for the 2022 tax year, and $6500 for the 2023. I don't know where the $1.89 difference is coming from.

Edit: both 1099-R show Distribution Code 2 in box 7 and box IRA/SEP/Simple is checked. Boxes 2b "taxable amount not determined" and "total distribution" are checked as well.

What are we doing wrong? Thank you in advance!

[User2698470]

I deleted our 2 1099-Rs and our tax liability goes down to $135. As soon as I load my 1099-R is goes up to $484. As soon as I load my Wife's 1099-R it goes up to $1,927. 

Since the 1099-R includes funding made for both 2022 and 2023, should we limit the gross distribution to $6500 (2023 limit) instead of the $7k+ and $12k+ what our 1099-Rs show? If I do this, our tax liability goes back down to $135 as it was before entering the 1099-R.

[AnnetteB6]

No, you should not limit the information shown on your Form 1099-R.  Those must be reported in your return as they were received or you are certain to be contacted by the IRS due to the mismatch between your return and the Form 1099-R.

Based on the information that you shared, it seems that the basis in the Traditional IRA from making a non-deductible contribution in 2022 has not been taken into account.  

First, you need to check your 2022 tax return to see if the contributions that you made were deducted on Form 1040 Schedule 1 line 20 or if that line is blank or zero.  If the amounts put into the Traditional IRAs are shown on that line, then those amounts will be taxable when converted to a Roth IRA.  This scenario would mean that $5500 + $513.47 would be taxable and $1452.70 + $1.89 would also be taxable on the 2023 return.

If the amounts were non-deductible contributions, then they should have been shown on Form 8606 for each of you and included as part of your tax return filed for 2022.  If your return did not include Form 8606, then you need to create one and file it now by mail on its own.  You will also need to enter the prior year contribution information into your 2023 return as basis for the Traditional IRA accounts.  The result of doing this will be that only the $513.47 and $1.89 portions of the distribution will be taxable.  These amounts would represent gains in the Traditional IRA that were earned before the distribution was taken and converted to the Roth IRA.  

Take a look at the information in the following TurboTax article.  This gives you step-by-step instructions to enter the back door Roth IRA conversion.  It seems you have probably completed the steps correctly except for the prior year (2022) basis.  Click the link If your conversion contains contributions made in 2023 for 2022 and be sure to follow those steps to finish up the process.

How do I enter a backdoor Roth IRA conversion?

@rubenandrea425 
 

[User2698470]

Thanks Anette, I really appreciate the thorough response.

I checked my 2022 tax returns and Line 20 of 1040 Schedule 1 is blank. Also, my accountant did not file a form 8606 (at least it's not in my records).

I'm doing some research on how to file Form 8606, but could you please provide more details on this: "enter the prior year contribution information into your 2023 return as basis for the Traditional IRA accounts."?

From your explanation, I understood that the Form 8606 doesn't fix the double taxation of the $20k+, it just cleans the 2022 tax returns. How can I ensure I only pay taxes on the $513.47 and $1.89?

Thanks.

Thank you.

[AnnetteB6]

Entering the basis that was due to the non-deductible 2022 contributions and entering your 2023 non-deductible contributions should ensure that you only pay taxes on the earnings in each of the accounts.

You will enter the basis (total of your non-deductible contributions) of the Traditional IRA in the Deductions and Credits > Retirement and Investments > Traditional and Roth IRA Contributions section of your return.  

As you get started in that section, check the box that you have a Traditional IRA and go through the screens until you see a question about 'any non-deductible contributions' to your IRA.  Check 'yes' and then enter the total basis of the account as of the end of 2023.  Remember, this is only asking for the contributions that were made, not the total value of the IRA.  

@User2698470 

[User2698470]

Annette, you have been incredibly helpful. Thanks for all the guidance. Tax liability went from $135 to $259 which I think is aligned with the capital gains of the $513.47 + $1.89.

Last couple of  questions :), is there anyway to file the 2022  8606 form in TurboTax?

If not, do I need to file or attach any other form? How do I mail each 2022 8606 form?

Thanks in advance!

[RobertB4444]

If you amend your 2022 form 1040 you can submit the 8606 electronically along with the complete return.  This is what I would recommend.

If you want to submit the 8606 by itself there is no way to do that in TurboTax although you can still use the software to prepare the form and then to print it in order to mail in.

Here are the mailing addresses by state for the IRS.

@User2698470