Why does entering the year end value of traditional IRA raise my tax due ?

[ok3361]

After entering my traditional IRA RMD information my tax due went up as expected, but then when I entered the year end value of my traditional IRA the tax due went up again which doesn't make sense.  Why did this happen?

[ThomasM125]

If you had non-taxable distributions from your IRA, the year-end value of it could be used to determined the taxable amount of the distributions. So that is one reason it may affect your tax.

[ok3361]

Thanks for the info Thomas.  I did have non deductible contributions to the IRA and the amount (non taxable portion of the distribution) is calculated in Form 8606 which does use the Year end IRA value in the calculation.  However, it seems to me that by lowering the taxable amount, the total tax due should go down not up after entering the year end value?  

[ThomasM125]

I would agree, you would have to remove the entry, then look your tax return, then put it back in and compare again to see what is going on.

[ok3361]

Thanks again for responding.  I have tried removing the year end IRA value to see what happens.  When I do remove the value the amount of tax due goes down.  However it goes down because the taxable IRA distribution amount (line 4b) goes down (to an incorrect value).  Putting the year end value back raises the tax due back up and the line 4b back to the correct value.  So it appears the the tax due may be correct, I just don't understand why the tax goes up when the IRA distribution is first entered, and it goes up again when the year end value is entered.  When that happens, TurboTax leads one to suspect that somehow the year end value is being taxed.

[DaveF1006]

It depends.  Are you only reporting your own year end balance or entering a combined balance between you and your spouse? Also, did you enter a total for all traditional IRAs including SEP, SIMPLE and rollover traditional IRAs?

[macuser_22 · Accepted solution]

Yes.  The tax due WILL go up if there is a year end value.     That is how non-deductible basis works.

By NOT entering the year end value ALL the remaining basis is applied that will of course lower the tax, but tax law requires that the basis in the IRA must be pro-rated between the 2020 distribution and the remaining IRA value which is the aggregate total of all existing Traditional, SEP and SIMPLE IRA accounts on Dec 31, 2020.

That amount goes on line 6 of the 8606.

You can NEVER withdraw ONLY the nondeductible part - it must be prorated over the entire value of ALL Traditional IRA accounts which include SEP and SIMPLE IRA's. (For tax purposes you only have ONE Traditional IRA which can be split between as many different accounts as you want, but for tax purposes they are all added together).

For example using rough figures: if you had $60K of nondeductible contributions in an IRA with a total value of $600K (10:1 ratio), then when you take a $60K distribution from any IRA account $6,000 would be nontaxable and $54,000 would be taxable (same 10:1 ratio) , with the remaining $54K of basis staying in the IRA for future distributions. As long as there is any money in the IRA, there will be some basis.

TurboTax will ask for your non-deductible "basis" and then the *Total Value* of *all* Traditional IRA, SEP and SIMPLE accounts as of Dec 31, of the tax year. That is so the prorating of the basis can be properly proportioned between the current years distribution and the remaining IRA value. That is done on the 8606 form.

[ok3361]

Only the balance for myself, my wife is not yet required to take a RMD from her act.  Yes the amount entered is the total of all traditional IRA's.

[ok3361]

Thanks for this explanation, I think I get it now.  Until I enter the year end value, the tax is being calculated based on taking the entire remaining nondeductible basis, by entering the year end balance the pro rated value is calculated and the tax adjusted.  Mystery solved!