Is EA right with my taxes? I think is she is wrong!

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splunk
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Is EA right with my taxes? I think is she is wrong!

Post by splunk »

Hello,

I've been following bogleheads for a few years now and learnt a lot from this forum. This is my first post and need help with my tax situation.

For the past few years I've been using freetaxusa to file my taxes (courtesy this forum). This year, however, I went to an Enrolled Agent (EA) to help with my taxes mainly due to Roth IRA recharacterization. I had to change my job in May, 2021 and this caused my salary to go up beyond Roth IRA income limits.
I had contributed $6000 to Roth IRA in January, 2021. While filing taxes using freetaxusa, the software flagged me for the entire $6000 as excess contribution. I learnt about Roth IRA recharacterization in this forum and called Vanguard on 03/03/22 to help me with this and the agent at Vanguard promptly helped me by opening a traditional IRA and transferred approximately $6,500 from my Roth. Next day on 03/04 I converted the entire amount around $6,400 (VTSAX dropped by a few dollars) to Roth IRA. I then called Vanguard to confirm when will I get 1099-r form? The agent confirmed I'll only get it next year in January.

Now the actual problem. I tried Trubotax and Freetaxusa to report recharacterization. In Turbotax I was not able to navigate to form 8606 although I tried following instructions online, again through one of the posts in bogleheads. In freetaxusa I was able to do it, but then decided not to go because a) I was not confident if I did it right and b) I wanted paper bonds. Hence I decided to go to a tax expert, an Enrolled Agent who I thought can help.

I took all my documents including the Roth conversion document and explained my situation and she promptly scanned all my documents and said she'll email me when she is done with my taxes. I receive the email after 2 weeks and upon review I found the following issues and reviewed with her on the phone
1. Missed entering numbers from one of the 1099 -INT forms
[EA's Reply] - She did not have 1099-INT and asked me to send in an email and she can fix it.
2. She could not figure out that I had excess contribution to 401K
[EA's Reply] - She quickly summed up the numbers and said, yes I had contributed extra, but the software did not prompt her and she thinks for the small amount around $600 IRS will not send me a letter.
3. No form 8606
[EA's Reply] - Since I do not have 1099 -r and form 5498 from Vanguard I do not have to report this year and only report it next year when I'll have the forms.

I need help in figuring out if the EA is right? especially with form 8606? Reading various posts here I believe that I've to fill form 8606 while filing my taxes for 2021. Assuming EA is wrong, should I find a new CPA to work with? or can this be done in Turbotax or any other software? Also, How do I politely tell the EA that I do not want her services?

Thank you and appreciate your help.
rkhusky
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Re: Is EA right with my taxes? I think is she is wrong!

Post by rkhusky »

The recharacterization made the contribution as if you had initially contributed to a tIRA. Since you won't be claiming the tIRA deduction due to having too high of income, you have a non-deductible tIRA contribution for 2021, which is documented on Form 8606.

The Roth conversion was done this year and will go on next year's taxes and will be documented on the 2022 1099-R.

You will also file an 8606 next year to show that you only owe taxes on the gains of the tIRA contribution ($400 = $6400 - $6000).

You won't get your 2021 Form 5498 until mid-May. You don't need a 5498 to file your taxes. It is sent out after the last day for which you can make 2021 IRA contributions, which is usually tax day.

Welcome to Bogleheads!
little_star
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Re: Is EA right with my taxes? I think is she is wrong!

Post by little_star »

You need to file IRS Form 8606 for your 2021 taxes, as this documents your non-deductible contribution. If you had no IRA distributions in 2021, you will only need to complete lines 1, 3, and 14, all with your $6k non-deductible contribution. You will also need to have a short statement regarding your recharacterization included in your filing for 2021.

You will need to file IRS Form 8606 with your 2022 taxes, documenting the Roth conversion. If you have no pre-tax $$ in a traditional IRA (SEP, SIMPLE, rollover, etc) on December 31, 2022, you will only be taxed on the gain. It can be constructive to complete a draft version of this form now, while your transactions are fresh in your memory. Download a copy of this year's form and simply complete with year+1 for all dates.
new2bogle
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Re: Is EA right with my taxes? I think is she is wrong!

Post by new2bogle »

You can double-check your EA's work by using taxact or turbotax, which lets you, for free, put in every form you get, regardless of situation and come out with what you owe/get back. You only pay when you file.
ekid
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Re: Is EA right with my taxes? I think is she is wrong!

Post by ekid »

It is not at all clear but the way I read these answers your EA is correct on all points!?
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retiredjg
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Re: Is EA right with my taxes? I think is she is wrong!

Post by retiredjg »

Welcome to the forum. :happy
splunk wrote: Sun Apr 03, 2022 11:47 pm 1. Missed entering numbers from one of the 1099 -INT forms
[EA's Reply] - She did not have 1099-INT and asked me to send in an email and she can fix it.
Maybe it got lost. Not an issue if she corrects.

2. She could not figure out that I had excess contribution to 401K
[EA's Reply] - She quickly summed up the numbers and said, yes I had contributed extra, but the software did not prompt her and she thinks for the small amount around $600 IRS will not send me a letter.
If this is a Solo 401k (you are your own boss), I think you may have to fix it but I'm not sure.

If this is an employer's 401k, this sometimes happens when people have two separate 401ks in one calendar year. The tax software simply does not let you deduct too much (which is probably why she didn't get a prompt). It just adds the excess to your taxable income instead of deducting too much.

This sounds illegal, but it is not. You just have to pay tax on that $600 again when you take the money out. No big deal and easier to leave it than to get it returned to you.

3. No form 8606
[EA's Reply] - Since I do not have 1099 -r and form 5498 from Vanguard I do not have to report this year and only report it next year when I'll have the forms.
This is partially right and partially wrong.

A 2021 Form 8606 (Lines 1, 3, and 14) is required to document your non-deductible contribution to tIRA for 2021. This is frequently overlooked by tax-preparer's of all types and might be because the tax-payer does not know to point out that there was a non-deductible contribution that needs to be documented. This is easily fixed.

It should be entered as a Roth IRA contribution and then noted that it was recharacterized to tIRA. There is a comment section on Form 8606 where this can be stated.

The EA is correct that the conversion happened in 2022 and will be documented on Form 8606 with your 2022 taxes. That is also when the 1099 will be issued.


Assuming EA is wrong, should I find a new CPA to work with?
Difficult question. This is a stumbling block for a lot of tax-preparers, even the ones who should be more informed like EAs. It sounds like she is willing to listen. Many are not. If you two can work together and get this resolved, I'd stick with her. If not, you may need to do your taxes yourself because finding any tax-preparer who knows how to use this form right is a bit of a crap shoot.


....or can this be done in Turbotax or any other software?
This can all be done with Turbotax, but it frequently does take some outside support to know how to enter it in TT to get the result you want. I assume you have seen that since you mentioned earlier threads.

Good luck.
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neurosphere
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Re: Is EA right with my taxes? I think is she is wrong!

Post by neurosphere »

splunk wrote: Sun Apr 03, 2022 11:47 pm 1. Missed entering numbers from one of the 1099 -INT forms
[EA's Reply] - She did not have 1099-INT and asked me to send in an email and she can fix it.
2. She could not figure out that I had excess contribution to 401K
[EA's Reply] - She quickly summed up the numbers and said, yes I had contributed extra, but the software did not prompt her and she thinks for the small amount around $600 IRS will not send me a letter.
3. No form 8606
[EA's Reply] - Since I do not have 1099 -r and form 5498 from Vanguard I do not have to report this year and only report it next year when I'll have the forms.
1. This is common/understandable, in that humans make mistakes/typos and there is literally no way one can have a profitable tax business if one aspires to a 100% "no-error" rate on data entry. It also partly depends on how you provided the information. For example, if providing a pile (or scan or pdf) with a dozen documents, it can be easy to miss one. That's why it's important for clients to review taxes and verify the raw numbers (address, SS#s, W2 data, 1099 entry, etc). Errors on "tax" treatment should be exceedingly rare for competent tax preparers however.

2. The software SURELY caught this but did not "flag" it perhaps if it was due to multiple employers. The excess contribution gets added to your wages as taxable income. Add up your box 1 wages and compare to your taxes. The IRS will not "contact you" if you reported the excess contribution as wages. If not corrected, you'll pay taxes again on this $600. This may be the easiest thing to do (i.e. just pay the tax and let it be). It can be a pain to get the excess contribution returns, and besides if you don't do it by the tax deadline it's likely a moot point.

3. Others have already commented on this. You indeed need to report any amount of 2021 IRA contribution on form 8606 if you want to appropriately avoid taxes later. Traditional IRA contributions (whether deductible of not) are your responsibility to inform your tax preparer of. Now, she should have realized that a form 8606 was needed upon learning you recharacterized a Roth IRA contribution.
Topic Author
splunk
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Re: Is EA right with my taxes? I think is she is wrong!

Post by splunk »

Thank you for the perfect replies @retiredjg and @neurosphere. You guys absolutely nailed it and I've all the information I was looking for. Much appreciated.
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Duckie
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Re: Is EA right with my taxes? I think is she is wrong!

Post by Duckie »

splunk wrote: Sun Apr 03, 2022 11:47 pm 3. No form 8606
[EA's Reply] - Since I do not have 1099 -r and form 5498 from Vanguard I do not have to report this year and only report it next year when I'll have the forms.
I don't know about the other stuff but this is wrong. You recharacterized a 2021 Roth IRA contribution to a non-deductible TIRA contribution in 2022. That means you need to fill out the 2021 Form 8606 Part I to document the non-deductible basis and you need to fill out the required recharacterization statement.
can this be done in Turbotax or any other software?
Yes, you can do the above question 3 part in TurboTax. You need to tell TurboTax (by answering the questions in the deduction section) that you made a $6,000 contribution to a Roth IRA and then you recharacterized the $6,000 plus $500 earnings to a TIRA and that the now TIRA contribution is non-deductible. "Recharacterized" triggers the required recharacterization statement and "non-deductible" triggers Form 8606. That form will only have four lines filled in for 2021.
  • Part I
    Line 1 -- 6000 (non-deductible contribution for 2021)
    Line 2 -- 0 (previous basis)
    Line 3 -- 6000
    Line 14 -- 6000 (current basis, goes on line 2 next year)
That's it for your 2021 Form 8606. The $6400 conversion will go on your 2022 taxes.

You should read the instructions for Form 8606. The Recharacterizations section starts on page 4. In your case:
  • "You made a contribution to a Roth IRA and later recharacterized part or all of it in a trustee-to-trustee transfer to a traditional IRA. Report the nondeductible traditional IRA portion of the recharacterized contribution, if any, on Form 8606, Part I. Don’t report the Roth IRA contribution (whether or not you recharacterized all or part of it) on Form 8606. Attach a statement to your return explaining the recharacterization. If the recharacterization occurred in 2021, include the amount transferred from the Roth IRA on your 2021 Form 1040, 1040-SR, or 1040-NR, line 4a. If the recharacterization occurred in 2022, report the amount transferred only in the attached statement, and not on your 2021 or 2022 tax return."
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Re: Is EA right with my taxes? I think is she is wrong!

Post by Misenplace »

This thread is now in the Personal Finance (Not Investing) forum since it is about "Non-investing personal finance issues including insurance, credit, real estate, taxes, ..."

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splunk
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Re: Is EA right with my taxes? I think is she is wrong!

Post by splunk »

Thank you, @Duckie.
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neurosphere
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Re: Is EA right with my taxes? I think is she is wrong!

Post by neurosphere »

Duckie wrote: Mon Apr 04, 2022 6:19 pm You should read the instructions for Form 8606. The Recharacterizations section starts on page 4. In your case:
  • "If the recharacterization occurred in 2021, include the amount transferred from the Roth IRA on your 2021 Form 1040, 1040-SR, or 1040-NR, line 4a. If the recharacterization occurred in 2022, report the amount transferred only in the attached statement, and not on your 2021 or 2022 tax return."
Just an fyi that my tax software (TaxAct) correctly places the recharacterization amount on line 4a for a tax year in which there is a 1099 reporting this recharacterization.

Neurosphere

P.S. And just as an interesting aside, I just came across a situation where a client asked for a recharacterization from Roth to Traditional but Fidelity made a mistake and essentially performed a second subsequent recharacterization from Traditional to Roth which then had to AGAIN be recharacterized back to Traditional prior to a Roth conversion. The reporting was certainly a mess, and line 4a shows $18,000 for a tax year in which only $6000 was ever originally contributed to an IRA. :oops:
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes" (even in taxable accounts).
Topic Author
splunk
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Re: Is EA right with my taxes? I think is she is wrong!

Post by splunk »

Hello Everyone,

I need help on this topic again. I followed your advise and filled in 8086 using freetaxusa.

For the year 2022 I did back door Roth IRA since my income had increased. I received two 1099 - Rs in January 2023. One for the recharacterization of Roth IRA of 2021 and another for tIRA (back door Roth IRA 2022).

While filing taxes using freetaxusa the software is issuing a warning that I need to amend my 2021 returns for 1099 R since the distribution code is R and the year showing on 1099 is 2022.

I contacted freetaxusa and agent replied to me with this message.
"Yes. . . I was looking at that, and since you didn't already include the distribution for the recharacterization on your 2021 tax return, you will need to amend your 2021 tax return and include this 1099-R form with the amendment. You did mention the recharacterization on the 2021 return, but since you recharacterized in 2022, you didn't get the 1099-R until now and the 1099-R distribution needs to be reported now through an amendment to the 2021 return."

I replied to that message with what rkhusky has posted here and then the agent said, she/he will contact their pro team and one of the pro team members will send me an email with the reply. Following is the message I got in my email.

Hello,

You need to do a couple of things:

1.) You need to delete the 1099-R for the recharacterization since that needs to be reported on an amended 2021 return.
2.) Enter the traditional IRA conversion 1099-R > Answer No to the question about whether the IRA is inherited and click Save and Continue > Answer Yes on the screen labeled "Is this a Roth conversion?" > Click No, Continue on the screen labeled "Your Retirement Income (Form 1099-R)"
3.) On the screen labeled "Prior Year IRA Contributions" answer Yes > Click Save and Continue
4.) On the screen labeled "Traditional IRA Basis and Value" enter the amount that you recharacterized from the Roth to the Traditional IRA in the line that asks about "Total Basis, if any, in traditional IRAs for 2021 and earlier years:" Click Save and Continue.

Let us know if there is anything else that we can do.

Thanks for using Pro Support
Mr.X, EA
Tax Pro Support

Do I really need to amend my 2021 returns? From the responses I got last year here from rkhusky, little_star, retiredjg, neurosphere, and Duckie there is no mention of amending my returns. All I was thinking was I should file 8086 for 2022 as well. Will moving to Turbotax/Taxact or some other software help me?

I've a few questions on 1099 R for tIRA, but I'll keep them for another thread.
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Duckie
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Re: Is EA right with my taxes? I think is she is wrong!

Post by Duckie »

splunk wrote: Fri Mar 31, 2023 5:16 pm While filing taxes using freetaxusa the software is issuing a warning that I need to amend my 2021 returns for 1099 R since the distribution code is R and the year showing on 1099 is 2022.
Can you ignore the warning and continue or does it freeze you out?
Do I really need to amend my 2021 returns?
When you filed your 2021 taxes after the recharacterization in 2022 did you (or your EA) add the required recharacterization statement? Above you quoted FreeTaxUSA as saying "You did mention the recharacterization on the 2021 return," but I'm just confirming that required statement made it onto the 2021 return. Since Form 8606 was apparently not included for 2021 did you send it in on its own after writing your post?
All I was thinking was I should file 8086 for 2022 as well. Will moving to Turbotax/Taxact or some other software help me?
Yes, you need to add Form 8606 to your 2022 return to report the 2022 non-deductible contribution and the two conversions. I use TurboTax Deluxe download version and I know how to make that work for the backdoor Roth method. I have no knowledge of TaxAct.
I've a few questions on 1099 R for tIRA, but I'll keep them for another thread.
If this concerns the 2021 or 2022 taxes, just ask on this thread.
Topic Author
splunk
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Re: Is EA right with my taxes? I think is she is wrong!

Post by splunk »

Duckie wrote: Fri Mar 31, 2023 6:16 pm
splunk wrote: Fri Mar 31, 2023 5:16 pm While filing taxes using freetaxusa the software is issuing a warning that I need to amend my 2021 returns for 1099 R since the distribution code is R and the year showing on 1099 is 2022.
Can you ignore the warning and continue or does it freeze you out?
I can continue, but I'm concerned that if there is an audit from IRS. Freetaxusa may not support me in responding to the audit since I'm not following their advise.
Do I really need to amend my 2021 returns?
When you filed your 2021 taxes after the recharacterization in 2022 did you (or your EA) add the required recharacterization statement? Above you quoted FreeTaxUSA as saying "You did mention the recharacterization on the 2021 return," but I'm just confirming that required statement made it onto the 2021 return. Since Form 8606 was apparently not included for 2021 did you send it in on its own after writing your post?
Yes, I used freetaxusa to file the returns and I added the required recharacterization statement and got it validated by the freetaxusa agent.
All I was thinking was I should file 8086 for 2022 as well. Will moving to Turbotax/Taxact or some other software help me?
Yes, you need to add Form 8606 to your 2022 return to report the 2022 non-deductible contribution and the two conversions. I use TurboTax Deluxe download version and I know how to make that work for the backdoor Roth method. I have no knowledge of TaxAct.
Will this option be available in the online version of Turbotax? Or do I need to download the deluxe version?
I've a few questions on 1099 R for tIRA, but I'll keep them for another thread.
If this concerns the 2021 or 2022 taxes, just ask on this thread.
Sure - in my tIRA 1099 R. I see a Gross distribution amount and taxable amount as ~ $12,400. I'm assuming both the amounts, $6000 from back door IRA and $6,400 from IRA recharacterization are included here. Is it common? When filing returns should I only include the amount for 2022 backdoor Roth?
Thank you so much for responding quickly on this. I appreciate your help.
Last edited by splunk on Fri Mar 31, 2023 8:30 pm, edited 1 time in total.
Topic Author
splunk
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Re: Is EA right with my taxes? I think is she is wrong!

Post by splunk »

Corrected my reply.
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Duckie
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Re: Is EA right with my taxes? I think is she is wrong!

Post by Duckie »

splunk wrote: Fri Mar 31, 2023 8:22 pm
Duckie wrote: Fri Mar 31, 2023 6:16 pm
splunk wrote: Fri Mar 31, 2023 5:16 pm While filing taxes using freetaxusa the software is issuing a warning that I need to amend my 2021 returns for 1099 R since the distribution code is R and the year showing on 1099 is 2022.
Can you ignore the warning and continue or does it freeze you out?
I can continue, but I'm concerned that if there is an audit from IRS. Freetaxusa may not support me in responding to the audit since I'm not following their advise.
Did you purchase FreeTaxUSA's audit service?
Do I really need to amend my 2021 returns?
When you filed your 2021 taxes after the recharacterization in 2022 did you (or your EA) add the required recharacterization statement? Above you quoted FreeTaxUSA as saying "You did mention the recharacterization on the 2021 return," but I'm just confirming that required statement made it onto the 2021 return. Since Form 8606 was apparently not included for 2021 did you send it in on its own after writing your post?
Yes, I used freetaxusa to file the returns and I added the required recharacterization statement and got it validated by the freetaxusa agent.
Specifically, did you file the 2021 Form 8606 either with the 2021 return or later on paper?
All I was thinking was I should file 8086 for 2022 as well. Will moving to Turbotax/Taxact or some other software help me?
Yes, you need to add Form 8606 to your 2022 return to report the 2022 non-deductible contribution and the two conversions. I use TurboTax Deluxe download version and I know how to make that work for the backdoor Roth method. I have no knowledge of TaxAct.
Will this option be available in the online version of Turbotax? Or do I need to download the deluxe version?
I'm sure it's available in the online version, I just don't know if it's set up the same way as the download version.
I've a few questions on 1099 R for tIRA, but I'll keep them for another thread.
If this concerns the 2021 or 2022 taxes, just ask on this thread.
Sure - in my tIRA 1099 R. I see a Gross distribution amount and taxable amount as ~ $12,400. I'm assuming both the amounts, $6000 from back door IRA and $6,400 from IRA recharacterization are included here. Is it common?
Yes. That is the amount you took out of the TIRA when you converted in 2022. Confirming box 2b has the "Taxable amount not determined" box checked.
When filing returns should I only include the amount for 2022 backdoor Roth?
You enter the 1099-R data as it appears on the form. The ~$12,400 should appear on Form 1040 line 4a and the taxable amount on line 4b. You figure the taxable amount on Form 8606 by answering the questions correctly.

When doing this in the TurboTax Deluxe download version there are lots of extraneous questions that must be answered, but the relevant ones are:
  1. In the deduction section (after you have entered the two 1099-Rs in the income section) you check the boxes that show you have both a TIRA and Roth IRA.
  2. You contributed $6000 to a TIRA for 2022.
  3. You have made and tracked non-deductible contributions in the past and your previous basis from 2021 is $6000.
  4. You choose to NOT deduct your 2022 $6000 contribution.
The 2022 Form 8606 will look something like this:
  • Part I
    Line 1 -- 6000 (non-deductible contribution for 2022)
    Line 2 -- 6000 (previous basis from line 14 last year)
    Line 3 -- 12,000
    Line 4 -- probably 0 or blank unless you contributed for 2022 this year
    Line 5 -- 12,000
    Line 6 -- 0 (it had better be 0)
    Line 7 -- 0 or blank
    Line 8 -- 12,400 (amount converted in 2022)

    Then there is a bunch of figuring which may not show up on Form 8606 using software. There is a hidden worksheet where things happen behind the scenes. If you do the figuring on the paper form you can see what's missing.

    Line 14 -- 0 (current basis, 0 because you converted it all)

    Part II
    Line 16 -- 12,400 (amount converted from line 8)
    Line 17 -- 12,000 (non-taxable amount from line 11)
    Line 18 -- 400 (taxable amount, goes on Form 1040 line 4b)
Topic Author
splunk
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Re: Is EA right with my taxes? I think is she is wrong!

Post by splunk »

Duckie wrote: Fri Mar 31, 2023 9:36 pm
splunk wrote: Fri Mar 31, 2023 8:22 pm
Duckie wrote: Fri Mar 31, 2023 6:16 pm
splunk wrote: Fri Mar 31, 2023 5:16 pm While filing taxes using freetaxusa the software is issuing a warning that I need to amend my 2021 returns for 1099 R since the distribution code is R and the year showing on 1099 is 2022.
Can you ignore the warning and continue or does it freeze you out?
I can continue, but I'm concerned that if there is an audit from IRS. Freetaxusa may not support me in responding to the audit since I'm not following their advise.
Did you purchase FreeTaxUSA's audit service?
Yes. I did, but I don't pay until I file with them.
Do I really need to amend my 2021 returns?
When you filed your 2021 taxes after the recharacterization in 2022 did you (or your EA) add the required recharacterization statement? Above you quoted FreeTaxUSA as saying "You did mention the recharacterization on the 2021 return," but I'm just confirming that required statement made it onto the 2021 return. Since Form 8606 was apparently not included for 2021 did you send it in on its own after writing your post?
Yes, I used freetaxusa to file the returns and I added the required recharacterization statement and got it validated by the freetaxusa agent.
Specifically, did you file the 2021 Form 8606 either with the 2021 return or later on paper?
With 2021 return
All I was thinking was I should file 8086 for 2022 as well. Will moving to Turbotax/Taxact or some other software help me?
Yes, you need to add Form 8606 to your 2022 return to report the 2022 non-deductible contribution and the two conversions. I use TurboTax Deluxe download version and I know how to make that work for the backdoor Roth method. I have no knowledge of TaxAct.
Will this option be available in the online version of Turbotax? Or do I need to download the deluxe version?
I'm sure it's available in the online version, I just don't know if it's set up the same way as the download version.
Ok, let me try TutboTax Deluxe version.
  • Should I enter 1099 R information and then fill in 8086 or are there any specific steps to be followed?
I've a few questions on 1099 R for tIRA, but I'll keep them for another thread.
If this concerns the 2021 or 2022 taxes, just ask on this thread.
Sure - in my tIRA 1099 R. I see a Gross distribution amount and taxable amount as ~ $12,400. I'm assuming both the amounts, $6000 from back door IRA and $6,400 from IRA recharacterization are included here. Is it common?
Yes. That is the amount you took out of the TIRA when you converted in 2022. Confirming box 2b has the "Taxable amount not determined" box checked.
Yes. "Taxable amount not determined" box is checked.
When filing returns should I only include the amount for 2022 backdoor Roth?
You enter the 1099-R data as it appears on the form. The ~$12,400 should appear on Form 1040 line 4a and the taxable amount on line 4b. You figure the taxable amount on Form 8606 by answering the questions correctly.
Ok. Thank you.
When doing this in the TurboTax Deluxe download version there are lots of extraneous questions that must be answered, but the relevant ones are:
  1. In the deduction section (after you have entered the two 1099-Rs in the income section) you check the boxes that show you have both a TIRA and Roth IRA.
  2. You contributed $6000 to a TIRA for 2022.
  3. You have made and tracked non-deductible contributions in the past and your previous basis from 2021 is $6000.
  4. You choose to NOT deduct your 2022 $6000 contribution.
The 2022 Form 8606 will look something like this:
  • Part I
    Line 1 -- 6000 (non-deductible contribution for 2022)
    Line 2 -- 6000 (previous basis from line 14 last year)
    Line 3 -- 12,000
    Line 4 -- probably 0 or blank unless you contributed for 2022 this year
    Line 5 -- 12,000
    Line 6 -- 0 (it had better be 0)
    Line 7 -- 0 or blank
    Line 8 -- 12,400 (amount converted in 2022)

    Then there is a bunch of figuring which may not show up on Form 8606 using software. There is a hidden worksheet where things happen behind the scenes. If you do the figuring on the paper form you can see what's missing.

    Line 14 -- 0 (current basis, 0 because you converted it all)

    Part II
    Line 16 -- 12,400 (amount converted from line 8)
    Line 17 -- 12,000 (non-taxable amount from line 11)
    Line 18 -- 400 (taxable amount, goes on Form 1040 line 4b)
I'll keep this info handy.
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Duckie
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Re: Is EA right with my taxes? I think is she is wrong!

Post by Duckie »

splunk wrote: Sat Apr 01, 2023 8:09 am
Duckie wrote: Fri Mar 31, 2023 9:36 pm Specifically, did you file the 2021 Form 8606 either with the 2021 return or later on paper?
With 2021 return
Good. That means when you filed your 2021 taxes you included everything necessary for the recharacterization, so you do not have to amend your 2021 return.
Should I enter 1099 R information and then fill in 8086 or are there any specific steps to be followed?
You enter the 1099-R details in the income section. Then you go into the deduction section and answer the IRA questions. You don't fill in Form 8606 directly. Your answers will determine what appears on the form so you have to be careful.

The reason I prefer the download version is because I can toggle back and forth between the "EasyStep" questions and "Forms" mode to see what actually appears on Form 8606 while in progress so I know when something is off.
Confirming box 2b has the "Taxable amount not determined" box checked.
Yes. "Taxable amount not determined" box is checked.
Good. That means there won't be an issue when Form 1040 line 4a does not match line 4b.
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splunk
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Re: Is EA right with my taxes? I think is she is wrong!

Post by splunk »

Duckie wrote: Sat Apr 01, 2023 4:15 pm
splunk wrote: Sat Apr 01, 2023 8:09 am
Duckie wrote: Fri Mar 31, 2023 9:36 pm Specifically, did you file the 2021 Form 8606 either with the 2021 return or later on paper?
With 2021 return
Good. That means when you filed your 2021 taxes you included everything necessary for the recharacterization, so you do not have to amend your 2021 return.
Should I enter 1099 R information and then fill in 8086 or are there any specific steps to be followed?
You enter the 1099-R details in the income section. Then you go into the deduction section and answer the IRA questions. You don't fill in Form 8606 directly. Your answers will determine what appears on the form so you have to be careful.

The reason I prefer the download version is because I can toggle back and forth between the "EasyStep" questions and "Forms" mode to see what actually appears on Form 8606 while in progress so I know when something is off.
Confirming box 2b has the "Taxable amount not determined" box checked.
Yes. "Taxable amount not determined" box is checked.
Good. That means there won't be an issue when Form 1040 line 4a does not match line 4b.
Thank you for response, Duckie. However, TurboTax also gave me the same warning. I'm not sure if I'm doing anything wrong while entering information or if the rules have changed?
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Duckie
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Re: Is EA right with my taxes? I think is she is wrong!

Post by Duckie »

splunk wrote: Sat Apr 01, 2023 6:15 pm TurboTax also gave me the same warning. I'm not sure if I'm doing anything wrong while entering information or if the rules have changed?
What exactly is listed in every box (from 1 to 12) of your two 1099-Rs? Be specific.
Topic Author
splunk
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Re: Is EA right with my taxes? I think is she is wrong!

Post by splunk »

Duckie wrote: Sat Apr 01, 2023 6:28 pm
splunk wrote: Sat Apr 01, 2023 6:15 pm TurboTax also gave me the same warning. I'm not sure if I'm doing anything wrong while entering information or if the rules have changed?
What exactly is listed in every box (from 1 to 12) of your two 1099-Rs? Be specific.
Sure. For the Roth Recharacterization below are the details. Only 1, 2a and 7 are populated. Everything else is left blank.
2022 Form 1099-R
1 Gross distribution - ~ $6,400
2a Taxable amount - $0
2b Taxable amount not determined - ( )
Total distribution ( )
3 Capital gain (included on line 2a)
4 Federal income tax withheld
5 Employee/Desig Roth Contribs or Insur
Premiums
6 Net unrealized appreciation in employer's
securities
7 Distribution code(s) - R
IRA/SEP/SIMPLE - ( )
8 Other amount
Other amount percentage - %
9a Your percentage of total distribution - %
9b Total employee contributions
10 Amount allocable to IRR within 5 years
11 1st year of desig. Roth contrib.
12 FATCA filing requirement - ( )

For tIRA below are the listings from 1 - 12:
2022 Form 1099-R
1 Gross distribution - ~$12,400
2a Taxable amount - ~$12,400 (Same amount as box 1)
2b Taxable amount not determined (X)
Total distribution (X)
3 Capital gain (included on line 2a)
4 Federal income tax withheld
5 Employee/Desig Roth Contribs or Insur
Premiums
6 Net unrealized appreciation in employer's
securities
7 Distribution code(s) 2
IRA/SEP/SIMPLE (X)
8 Other amount
Other amount percentage %
9a Your percentage of total distribution %
9b Total employee contributions
10 Amount allocable to IRR within 5 years
11 1st year of desig. Roth contrib.
12 FATCA filing requirement ( )
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Duckie
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Re: Is EA right with my taxes? I think is she is wrong!

Post by Duckie »

Ok, I just made a dummy return and in EasyStep mode when entering the Roth IRA distribution 1099-R (Roth IRA recharacterization to TIRA), TurboTax also told me "It looks like you may need to amend your 2021 return." I ignored it and kept going. After adding the TIRA distribution 1099-R (TIRA conversion to Roth IRA) and going to the deduction section and answering all the questions, I went into Forms mode and looked at the Form 8606 and found it was filled out correctly and transferred to the Form 1040 lines 4a and 4b correctly.

As expected, the Roth IRA distribution 1099-R amount of $6400 was not added to line 4a on the 2022 Form 1040 which would have made line 4a $18,800 instead of $12,400. It was not supposed to based on the instructions:
  • "If the recharacterization occurred in 2022, report the amount transferred only in the attached statement, and not on your 2021 or 2022 tax return."
But sometimes things do not go as they are supposed to. Fortunately, this time they did.

Since you properly recharacterized the 2021 Roth IRA contribution in time to include it on your 2021 taxes and since you added both the required recharacterization statement and the 2021 Form 8606 to report the non-deductible contribution on your 2021 taxes I do not see why you would need to amend the 2021 return.
Last edited by Duckie on Mon Apr 03, 2023 10:26 am, edited 1 time in total.
Topic Author
splunk
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Re: Is EA right with my taxes? I think is she is wrong!

Post by splunk »

Duckie wrote: Sun Apr 02, 2023 4:03 pm Ok, I just made a dummy return and in EasyStep mode when entering the Roth IRA distribution 1099-R (Roth IRA recharacterization to TIRA), TurboTax also told me "It looks like you may need to amend your 2021 return." I ignored it and kept going. After adding the TIRA distribution 1099-R (TIRA conversion to Roth IRA) and going to the deduction section and answering all the questions, I went into Forms mode and looked at the Form 8606 and found it was filled out correctly and transferred to the Form 1040 lines 4a and 4b correctly.

As expected, the Roth IRA distribution 1099-R did not show up on the 2022 Form 1040. It was not supposed to based on the instructions.
  • "If the recharacterization occurred in 2022, report the amount transferred only in the attached statement, and not on your 2021 or 2022 tax return."
Since you properly recharacterized the 2021 Roth IRA contribution in time to include it on your 2021 taxes and since you added both the required recharacterization statement and the 2021 Form 8606 to report the non-deductible contribution on your 2021 taxes I do not see why you would need to amend the 2021 return.
Thank you so much! Let me try these steps. I'll let you know how it goes.
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Duckie
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Re: Is EA right with my taxes? I think is she is wrong!

Post by Duckie »

splunk wrote: Sat Apr 01, 2023 11:42 pm For the Roth Recharacterization below are the details. Only 1, 2a and 7 are populated. Everything else is left blank.
2022 Form 1099-R
<snip>
7 Distribution code(s) - R
IRA/SEP/SIMPLE - ( )
Are you sure the IRA box is not checked? It should be since this was a distribution from a Roth IRA. I checked it both ways and the results were the same, but it is incorrect.

Also, I edited the second section of my above post for clarification.
Topic Author
splunk
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Re: Is EA right with my taxes? I think is she is wrong!

Post by splunk »

Duckie wrote: Mon Apr 03, 2023 10:30 am
splunk wrote: Sat Apr 01, 2023 11:42 pm For the Roth Recharacterization below are the details. Only 1, 2a and 7 are populated. Everything else is left blank.
2022 Form 1099-R
<snip>
7 Distribution code(s) - R
IRA/SEP/SIMPLE - ( )
Are you sure the IRA box is not checked? It should be since this was a distribution from a Roth IRA. I checked it both ways and the results were the same, but it is incorrect.
Yes, it is not checked. I called Vanguard after I saw your message and the representative said, "It was not pretax ira therefore it is not checked"
Also, I edited the second section of my above post for clarification.
I followed your steps in both Turbotax and FreeTaxUSA. In Turbotax online I could only preview 1040 and I see the correct entries for 4a and 4b. In FreeTaxUSA I could preview both 8606 and 1040 and I see below values.

Part I
Line 1 -- 6,000
Line 2 -- 6,000
Line 3 -- 12,000
Line 4 -- blank
Line 5 -- 12,000
Line 6 - Line 12 -- blank
Line 13 -- 12,000
Line 14 - 15c -- blank

Part 2
Line 16 -- ~12,400
Line 17 -- 12,000
Line 18 -- ~400
Is it ok to have 0 in Line 8? Or Was there a mistake?

4a and 4b of 1040 are showing amounts ~$12,400 and ~$400 respectively
.
Thank you again for your help.
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Duckie
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Re: Is EA right with my taxes? I think is she is wrong!

Post by Duckie »

splunk wrote: Mon Apr 03, 2023 4:45 pm I followed your steps in both Turbotax and FreeTaxUSA. In Turbotax online I could only preview 1040 and I see the correct entries for 4a and 4b. In FreeTaxUSA I could preview both 8606 and 1040 and I see below values.

Part I
Line 1 -- 6,000
Line 2 -- 6,000
Line 3 -- 12,000
Line 4 -- blank
Line 5 -- 12,000
Line 6 - Line 12 -- blank
Line 13 -- 12,000
Line 14 - 15c -- blank

Part 2
Line 16 -- ~12,400
Line 17 -- 12,000
Line 18 -- ~400
Looks right to me.
Is it ok to have 0 in Line 8? Or Was there a mistake?
Form 8606 tax software frequently has a hidden worksheet that fills in lines 6 to 12 behind the scenes so you don't see the entries on the actual form. That is normal. Annoying, but normal.
4a and 4b of 1040 are showing amounts ~$12,400 and ~$400 respectively.
Good.
Topic Author
splunk
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Re: Is EA right with my taxes? I think is she is wrong!

Post by splunk »

Duckie wrote: Mon Apr 03, 2023 5:08 pm
splunk wrote: Mon Apr 03, 2023 4:45 pm I followed your steps in both Turbotax and FreeTaxUSA. In Turbotax online I could only preview 1040 and I see the correct entries for 4a and 4b. In FreeTaxUSA I could preview both 8606 and 1040 and I see below values.

Part I
Line 1 -- 6,000
Line 2 -- 6,000
Line 3 -- 12,000
Line 4 -- blank
Line 5 -- 12,000
Line 6 - Line 12 -- blank
Line 13 -- 12,000
Line 14 - 15c -- blank

Part 2
Line 16 -- ~12,400
Line 17 -- 12,000
Line 18 -- ~400
Looks right to me.
Is it ok to have 0 in Line 8? Or Was there a mistake?
Form 8606 tax software frequently has a hidden worksheet that fills in lines 6 to 12 behind the scenes so you don't see the entries on the actual form. That is normal. Annoying, but normal.
4a and 4b of 1040 are showing amounts ~$12,400 and ~$400 respectively.
Good.
You are godsend, Duckie. I was able to convince FreeTaxUSA that I do not need to file 2021 amend after showing 8086 and 1040 entries. I can't thank you enough.
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