Roth contribution AGI phaseout

[kathyc2]

Client over-contributed 400 to Roth due to AGI being 184K. Since it's a small penalty they may want to pay for 2015 rather than withdrawing the excess. If they choose to leave it in, is it correct that they pay the 2015 excess contribution penalty, then for 2016 I use the excess contribution as if it was contributed in 2016 even though the actual money was deposited in 2015? Do they need to notify the brokerage account for any reason?

[FEDUKE404]

Funds probably should be REMOVED

So far as I know, the penalty applies to the excess funds deposited (and related earnings) so long as those funds remain in the account. In theory, a penalty on the "same" funds can recur each year until those funds + assignable earnings are specifically removed from the account.

I've encountered retirement accounts where the manager said the "20XX funds" + earnings HAD to be removed to comply with IRS rules, and proceeded accordingly to include the generation of a Form 1099-R, often to include the infamous "Code P." OTOH, I had other clients where the manager could ( wink wink ), "take care of things," and just reassigned the same money to a different year. I believe a critical factor is also the date (2015 versus 2016) when the "bad" funds were originally placed into the Roth IRA.

Now I just go by what is on the tax papers (how do they "undo" the relevant original Form 5498??) and move forward. Over the years I've spent way too much energy trying to make sense of what went on in the back rooms of the custodian's business.

FE

[mactoolsix]

Client over-contributed 400 to Roth due to AGI being 184K. Since it's a small penalty they may want to pay for 2015 rather than withdrawing the excess. If they choose to leave it in, is it correct that they pay the 2015 excess contribution penalty, then for 2016 I use the excess contribution as if it was contributed in 2016 even though the actual money was deposited in 2015? Do they need to notify the brokerage account for any reason?

Kathy - just took a webinar on IRAs and one solution given was to leave the funds in the IRA, pay the first year penalty, and then the contribution can be used as a contribution for the next year (provide they qualify).

From the manual:
Excess contributions from one year may be treated as IRA contributions in a later taxable year, but the
6% excise tax applies to each year the excess contribution remains in the IRA. (IRC §§219(f)(6), 4973(a))
This correction occurs automatically for any year for which a taxpayer fails to contribute the maximum
allowable amount to the taxpayer’s IRA.

If you PM me I'll send you the webinar manual.

Mike

[Kram BergGold]

You Are Correct if

If in 2016, the TP is able to contribute at least as much as the 2015 overage, then you think of it as a 2016 contribution and there is no penalty for 2016. AS stated there is a 2015 penalty. Just be sure to warn him not to make a 2016 Roth contribution. Also be sure he does not anticipate even higher 2016 income such that he will not be able to make any Roth for 2016 because if this scenario unfolds he wil owe penalty for a 2016 excess contribution.

[FEDUKE404]

Explanation of webinar

(mactoolsix quote won't appear? ? ?)

Mike --

Re the webinar, just curious:

1) How was the original Form 5498, with an invalid amount, addressed? Or did that just become moot **IF** you went ahead and paid the calculated penalty in year #1??

2) At one time you not only had to clear the excess contributions but also remove (and pay tax on!) the earnings specifically assignable to those excess earnings, something akin to "fruit of the poisonous tree" concept. The calculations could be incredibly complicated, if something like funds were put into account in Jan 2015 and not removed until Feb 2016. . .and along the way the account had additional monthly/quarterly income from other investments internal to the account. If applicable, does all of this (earnings) ALSO go away when a new year is used? And wouldn't those separated earnings ALSO be considered a "new" contribution if your procedure is used?

As mentioned by Kram BergGold, if (for whatever reason) there becomes "too much" contributed in year #2, I could see a continuing problem. Perhaps best to repair things up front and move on? ?

Thanks for any input.

FE

[kathyc2]

Thanks for the input and concurrence that the amount can be left in and count as 2016 contribution. Personally, I don't think the 20 some dollar penalty is worth the extra paperwork for a disbursement of excess contributions, but I'll leave it up to the client to decide if it is or not.

[mactoolsix]

(mactoolsix quote won't appear? ? ?)

1) How was the original Form 5498, with an invalid amount, addressed? Or did that just become moot **IF** you went ahead and paid the calculated penalty in year #1??
FE

There was no mention about an invalid amount on the 5498 - in fact how could the administrator know for sure the amount was "invalid?"

(mactoolsix quote
2) At one time you not only had to clear the excess contributions but also remove (and pay tax on!) the earnings specifically assignable to those excess earnings, something akin to "fruit of the poisonous tree" concept. The calculations could be incredibly complicated, if something like funds were put into account in Jan 2015 and not removed until Feb 2016. . .and along the way the account had additional monthly/quarterly income from other investments internal to the account. If applicable, does all of this (earnings) ALSO go away when a new year is used? And wouldn't those separated earnings ALSO be considered a "new" contribution if your procedure is used?

As mentioned by Kram BergGold, if (for whatever reason) there becomes "too much" contributed in year #2, I could see a continuing problem. Perhaps best to repair things up front and move on? ?

FE

Yep, you still need to withdraw and pay tax on any earnings. We have had luck in that the retirement account administrators have always provide the earnings amount. The earnings need to be accounted for when allowing for the "rollover" to the new year contribution.

Mike

[FEDUKE404]

5498 question

There was no mention about an invalid amount on the 5498 - in fact how could the administrator know for sure the amount was "invalid?"

Mike

OK....my bad....poor choice of words.

How about: How was the original Form 5498, with a reported dollar amount for the Roth IRA contribution that was larger than the amount which the IRS will allow for the taxpayer's AGI, addressed? Or did that just become moot **IF** you went ahead and paid the calculated penalty in year #1??

Better?

Perhaps in my total ignorance I erroneously thought that the IRS might actually cross-reference such an official tax document for compliance purposes.

FE

[kathyc2]

So, after printing out the return for review, I noticed that the 2,500 taxable state refund from 2014 is what put them over the 183K. Without the refund they would be under the 183K. Seems like there should be an adjustment item for PY state refund to not count for Roth AGI, but not finding anything.

[FEDUKE404]

Reducing taxable amount of state refund

So, after printing out the return for review, I noticed that the 2,500 taxable state refund from 2014 is what put them over the 183K. Without the refund they would be under the 183K. Seems like there should be an adjustment item for PY state refund to not count for Roth AGI, but not finding anything.

Income is income.

Did you avail all possible "tricks" to reduce the taxable amount of the state refund as shown on line 10 of Form 1040? Sometimes that helps, especially if there were state tax payments, state estimated payments, or even considering the numbers taken from the 2014 state sales tax tables.

There usually is a worksheet in the software, and then you can select a yes/no answer as to whether to use the alternative calculation. I've found it's most useful to use when AGI is a factor, to include a person with large medical expenses or even "how much" of Soc Sec gets taxed.

In any case, rest assured it is NOT automatic to have to enter the full amount of a state refund when a person previously itemized!

FE

[kathyc2]

Income is income.

Did you avail all possible "tricks" to reduce the taxable amount of the state refund as shown on line 10 of Form 1040? Sometimes that helps, especially if there were state tax payments, state estimated payments, or even considering the numbers taken from the 2014 state sales tax tables.

There usually is a worksheet in the software, and then you can select a yes/no answer as to whether to use the alternative calculation. I've found it's most useful to use when AGI is a factor, to include a person with large medical expenses or even "how much" of Soc Sec gets taxed.

In any case, rest assured it is NOT automatic to have to enter the full amount of a state refund when a person previously itemized!

FE

All from W-2's so no "playing".

I'm not saying it shouldn't be income, but it just doesn't seem right to me that a page 2 deduction becomes page 1 AGI for AGI limit items like IRA's, taxable SS beni's, PTC, etc. That said, IN has a very flat tax and few deductions, so it's rare to have a large refund, but this return is not an IN return.

[FEDUKE404]

Valid option - no "playing" involved

All from W-2's so no "playing".

I'm not saying it shouldn't be income, but it just doesn't seem right to me that a page 2 deduction becomes page 1 AGI for AGI limit items like IRA's, taxable SS beni's, PTC, etc. That said, IN has a very flat tax and few deductions, so it's rare to have a large refund, but this return is not an IN return.

How did you get a state refund from a W2 ? ? ?

And, as for "page 2 deduction," wouldn't you be talking about the prior year return ? ? ?

I've used that procedure for several clients, as well as on my on return. End result is (perhaps) the full amount of the state refund as reported on the 2015 Form 1099-G does NOT show up on the front page of Form 1040 **IF* there were other state "payments" during the year, which in this case would be between 01/01/2015 and 12/31/2015. There is a pro-ration / allocation process used, which can also result in a negative adjustment to the state income taxes otherwise shown on Schedule A. This would fall into the "you can't have your cake (reduced refund income) and eat it too (use full state payments made in 2015)" category.

It's kinda a step or two up from state refunds are not taxable if, in the prior year, you didn't itemize and also are not taxable if you used the state sales tax tables.

Most tax software has a worksheet (you definitely will need the prior year tax returns!) and then there is a box ( or y/n ) where you can instantly toggle back and forth between using / not using the method to see what impact it will make on the bottom line.

FE