Form 8606

[Peachie]

Good evening Tax Community. Long time no "see" . Hope you all have been well.

I have a question. The dilemma is this:

T/P made a $4500 contribution to a traditional IRA in 2012. When she did her taxes for 2012 in 2013 she subtracted the $4500 as an adjustment. She didn’t qualify for the adjustment. She turned a non-deduction into a deduction, in error.

November 2014 she received a notice from IRS. Her income and taxable amounts had been recomputed. She paid the additional amount owed for the IRA.
She created an 8606, so that when she actually made the withdrawal she could deduct the $4500 since she already paid the taxes on it. She sent the 8606 for 2012 and 2013 to IRS to correct her tax records.

2014 she withdrew the $4500 which also had interest of $13. 1099R received for the withdrawal. The 8606 showed no taxable income was due on the withdrawal. She was not allowed to use the 8606 according to the tax office. Says she owes taxes on the money and will have to resolve the issue with the IRS; another said needs to resolve with Administrator. The reviewer of the return agreed she owed the taxes. The 2014 return was done using Tax Wise at the office and I guess the 8606 was taken off of the return.

Is this correct? Should she have to pay taxes twice? Why? Why not? I will give my opinion after reading what you learned people think.

Thanks.

Peachie

[S T]

Giving a bump on this as I am curious what someone else thinks.

[Roland Slugg]

Wow ... she made only $13 interest in two years on a $4,500 investment?

Do we have all the facts? Why was she not allowed a $4,500 IRA deduction on her 2012 return? Was she covered by a plan at work, and her income was above the phase-out level? Did she not have any earned income? When she submitted F-8606 for 2012, why did she also submit one for 2013? Then when she took the distribution in 2014, were there additional funds in her IRA from other years, or just the $4,500 (plus $13 interest)? If there was more, from tax-deductible contributions in other years, then only a portion of the $4,500 2012 contribution would come back out tax-free. Finally, what is the "tax office" that said she couldn't use the 8606 in 2014 ... presumably to show that the $4,500 coming out was not taxable? If you can clarify everything, you will probably receive some helpful replies.

[kathyc2]

Good evening Tax Community. Long time no "see" . Hope you all have been well.


2014 she withdrew the $4500 which also had interest of $13. 1099R received for the withdrawal. The 8606 showed no taxable income was due on the withdrawal. She was not allowed to use the 8606 according to the tax office. Says she owes taxes on the money and will have to resolve the issue with the IRS; another said needs to resolve with Administrator. The reviewer of the return agreed she owed the taxes. The 2014 return was done using Tax Wise at the office and I guess the 8606 was taken off of the return.


Peachie

I'm not sure I'm reading this correctly, but it sounds like maybe your question is why does the 1099R show it as taxable in box 2a? If so, that's not really a problem. IRA 1099R's generally have the entire amount in 2a, and taxable amount not determined. The 1099R issuer does not know if TP has a non-deductible IRA or not- it is not held in a separate account. Also, the issuer does not know what other IRAs TP may have at other institutions.

If my understanding of your question is correct, just follow the CY 8606 lines through and you should be fine.

[Peachie]

8606 made clearer

T/P made a $4500 contribution to a traditional IRA in 2012. When she did her taxes for 2012 in 2013 she subtracted the $4500 as an adjustment. She didn’t qualify for the adjustment. She turned a non-deduction into a deduction, in error.

November 2014 she received a notice from IRS. Her income and taxable amounts had been recomputed. She paid the additional amount owed for the IRA.
She created an 8606, so that when she actually made the withdrawal she could deduct the $4500 since she already paid the taxes on it. She sent the 8606 for 2012 IRS to correct her tax records.

2014 she withdrew the $4500 which also had interest of $13 ($4513). 1099R received for the withdrawal. The 8606 showed no taxable income was due on the withdrawal. She was not allowed to use the 8606 according to the tax office. Says she owes taxes on the money and will have to resolve the issue with the IRS. The reviewer of the return agreed.

I disagreed that she did not need an 8606 and her total withdrawal was taxable.

Is this correct? Why? Why not?

I will come back in a bit to answer your questions. One thing is she was ineligible for a deduction on the 2012 return because she was covered by a plan at work, etc.

Thanks every body.

Peachie

[Peachie]

I'm not sure I'm reading this correctly, but it sounds like maybe your question is why does the 1099R show it as taxable in box 2a? If so, that's not really a problem. IRA 1099R's generally have the entire amount in 2a, and taxable amount not determined. The 1099R issuer does not know if TP has a non-deductible IRA or not- it is not held in a separate account. Also, the issuer does not know what other IRAs TP may have at other institutions.

If my understanding of your question is correct, just follow the CY 8606 lines through and you should be fine.

Thanks for responding Kathy. I had no problem with the 1099R-it's correct. My problem was the manager saying it was all taxable and ignoring the 8606. $4500 should have been deductible because she already paid tax on it.

[Peachie]

Wow ... she made only $13 interest in two years on a $4,500 investment?

Do we have all the facts? Why was she not allowed a $4,500 IRA deduction on her 2012 return? Was she covered by a plan at work, and her income was above the phase-out level? Did she not have any earned income? When she submitted F-8606 for 2012, why did she also submit one for 2013? Then when she took the distribution in 2014, were there additional funds in her IRA from other years, or just the $4,500 (plus $13 interest)? If there was more, from tax-deductible contributions in other years, then only a portion of the $4,500 2012 contribution would come back out tax-free. Finally, what is the "tax office" that said she couldn't use the 8606 in 2014 ... presumably to show that the $4,500 coming out was not taxable? If you can clarify everything, you will probably receive some helpful replies.

Thanks for responding Roland. Sorry for the confusion. I had typed all of the answers to your questions and it just disappeared. Poof.

She wasn't allowed the $4500 because she had a plan at work and other limitations. She did her return without really paying attention to the instructs. I told her she needed an 8606 to show that she had made a nondeductible contribution in 2012. The 2013 info was just for info and I should have left it out, so just 2012 and 2014 are in play.

She had other IRA contributions but only $4500 was nondeductible. The others are taxable when withdrawn. I explained that only $13 of the $4513 should be taxable and the 8606 is used for that purpose. I was told NO. When I asked the manager what's the purpose of the 8606-he said he didn't know because he didn't know what it was.

I don't know every thing about ALL taxes but I know a lot about certain things and the 8606 is one of those things. I think I was seeking validation about the 8606 being required because two people said no. This is why I posted here. The t/p is leaving town and may not be back before April 15 so she told them to go ahead and file it. She knows she's paid taxes twice on the same money. She will need an amended return.

BTW, I volunteer at this office twice a week. I think they may have felt as a volunteer my comments were not valid. I sure hope this wasn't their thinking.

So, she should have received the 1099R because she made the distribution. However, she should not have had to pay taxes a second time. Am I off base here?

Thanks so much to each of you responding.

Peachie

[Peachie]

Giving a bump on this as I am curious what someone else thinks.

Thanks Sandy.

I hope you are having a wonderful day.

Peachie

[Roland Slugg]

Okay, based on your additional information, I can advise you further.

When someone's IRA consists of both deductible and nondeductible contributions, all withdrawals from that IRA consist of a taxable portion and a nontaxable portion, like a return of capital. An IRA owner can not remove just his/her nontaxable portion.

Here's an example: If you have an IRA with a value of $45,000, of which $4,500 consists of nondeductible contributions, only 10% of a distribution ($4,500 ÷ $45,000) from that IRA will be nontaxable, and the rest will be taxable. The calculations are made on form 8606, which must be attached to the return.

I'm surprised no one at "the office" knows what a F-8606 is and its purposes. That form should be attached to a return any year there is a nondeductible contribution made, and it's a good idea to include that form in the same person's return on your computer every year thereafter even if the form isn't required to be filed. That way your tax prep software will "track" the basis in the T/P's IRA ... at least my software does that ... making it easy to calculate the taxable/nontaxable portions of any distributions. Once a person has an IRA with a basis, every distribution thereafter will have a nontaxable element, and that won't change until all the funds in his IRA ... held by all trustees if more than one ... are distributed.

[Peachie]

Thank you!

Okay, based on your additional information, I can advise you further.

When someone's IRA consists of both deductible and nondeductible contributions, all withdrawals from that IRA consist of a taxable portion and a nontaxable portion, like a return of capital. An IRA owner can not remove just his/her nontaxable portion.

Here's an example: If you have an IRA with a value of $45,000, of which $4,500 consists of nondeductible contributions, only 10% of a distribution ($4,500 ÷ $45,000) from that IRA will be nontaxable, and the rest will be taxable. The calculations are made on form 8606, which must be attached to the return.

I'm surprised no one at "the office" knows what a F-8606 is and its purposes. That form should be attached to a return any year there is a nondeductible contribution made, and it's a good idea to include that form in the same person's return on your computer every year thereafter even if the form isn't required to be filed. That way your tax prep software will "track" the basis in the T/P's IRA ... at least my software does that ... making it easy to calculate the taxable/nontaxable portions of any distributions. Once a person has an IRA with a basis, every distribution thereafter will have a nontaxable element, and that won't change until all the funds in his IRA ... held by all trustees if more than one ... are distributed.

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You and I are on the same page Roland. I am so appreciative.

The reason an 8606 for 2013 was created is for the very reason you mentioned. Just to carry forward. I was the person recommending the 8606 as the t/p has always done her taxes which is why she had this particular problem. I always create an 8606 every year for my one client who has a nondeductible contribution she's had for years. If I'm not available the preparer can see she has a nondeductible.

I knew I wasn't nuts. I will help her get it all straight if she returns by April 13, which is my last day volunteering. Again, thank you, Kathy and Sandy for responding to my call. I feel better.

Peachie