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Where in ProSeries to enter earnings on excess contributions

Zazzy
Level 2

I have a client who has excess Roth contributions due to earning over the limit in 2020.  The client has requested the contributions and earnings be withdrawn from the account, which is now being completed.  The client will receive a 2021 1099-R in early 2022, indicating the withdrawal of excess of contributions and earnings, which are taxable in tax-year 2020.  No issues so far.  The question is when completing the 2020 return in ProSeries, where do I enter the earnings on excess contributions?  The client won't have a 1099-R in time to file for TY2020, so I don't think I should create a fictitious 1099-R.  Where do I enter the taxable earnings, also ensuring payment of the 10% early-withdrawal excise on those earnings?  Thank you.

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14 Replies 14
qbteachmt
Level 15

Start here:

https://www.irs.gov/publications/p590a

 

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Zazzy
Level 2

Your answer, which I will presume was well intentioned, was not particularly helpful.  I am thoroughly familiar with both Pub 590A and 590B.  I am well aware of the requirements to present it on the current year's taxes, since that is when the excess contributions were made.  What I need to know is from the standpoint of the ProSeries program, how to present the earnings on the excess contributions (which are really disallowed contributions due to income cap).  Since the excess contribution and earnings thereon weren't removed until February 2021, the brokerage will issue a 2021 1099-R, which will be sent in early 2022.  This 1099-R will indicate a Distribution Code in Block 7 of "P", which will indicate a return of excess contributions and earnings taxable in 2020.  All well and good.  The problem is when filing the client's 2020 return, I need to know where to enter this information and income.  I don't think I should create a fictitious 1099-R, since the IRS won't have received the corresponding Copy A until early 2022 when it is filed with them.  If I just enter as miscellaneous income, that won't generate the 10% excise penalty.  What I need to know is where to enter the earnings on the excess contributions for 2020, when the client won't have a 1099-R until 2022.  Thank you for trying.

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Chessie
Level 2

Good question as I am trying to work through the same issue.  I'm not finding a spot in Proseries Professional to enter the earnings on excess ROTH contribution other than just inputting on Schedule B which won't trigger the appropriate 10% penalty on early withdrawal.

And yes, I'm also familiar with Pub 590-A and 590-B

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qbteachmt
Level 15

Your Help article is here:

https://proconnect.intuit.com/community/individual/help/proseries-form-1099-r-faq-s/00/4853

This is not Sched B. This is 1099-R.

The excess contribution is reported for the Year it was contributed for. The earnings are taxable in the year removed.

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Chessie
Level 2

Thank you.

And is "earnings" defined as interest, dividend & capital gain?

Or does earnings include the net gain/loss in market valuation?

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qbteachmt
Level 15

"And is "earnings" defined as interest, dividend & capital gain?

Or does earnings include the net gain/loss in market valuation?"

Retirement accounts don't have these categories; it's ordinary income when you start to take distributions. Sheltered accounts have balances that grew or did not grow relative to Basis. You put in $5k; you take out $5k and the earnings from having that $5k in that account over that period.

The investment house or brokerage should return excess contributions and earnings.

If you really need to compute it yourself, use resources:

https://www08.wellsfargomedia.com/assets/pdf/personal/goals-retirement/taxes-and-retirement-planning...

https://www.investopedia.com/articles/retirement/04/042804.asp

https://www.thetaxadviser.com/issues/2020/apr/correcting-excess-contributions-iras.html

https://www.irahelp.com/forum-post/39031-calculation-earnings-excess-roth-ira-contributions-multiple...

https://www.fool.com/retirement/plans/roth-ira/excess-contribution/

"And yes, I'm also familiar with Pub 590-A and 590-B"

And Yes, use that, too. That's why it's provided.

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Zazzy
Level 2

I ended up creating a pseudo 1099-R in Pro Series for the withdrawal of excess contributions plus earnings.  I used information about the brokerage/securities firm to complete the top including their EIN.  I also marked the "Non-standard" box for the 1099-R, since an actual one wasn't received.  These are what I used to complete the specific blocks (for Roth IRA):

Box 1 Total Amount: Amount of entire return of excess contributions including earnings

Box 2a Taxable Amount: Just the amount of the earnings

Box 4 Federal Income Tax Withheld: 0 (unless the client did have some withheld)

Box 7 Distribution Codes: 8 J

For the state my particular client lived in, the state amounts mirrored the federal, but obviously it would be whatever the tax code is in the state you are preparing.

For Box 7 being 8 (Excess contributions plus earnings taxable in current year) and J (Early distribution from a Roth IRA, no known exception), I took this from a previous instance, but where the client did receive the 1099-R in time for the routine filing, in other words the excess contributions were in 2019, withdrawn in calendar year 2019, and received a 2019 1099-R in early 2020.  For the one I had this year, the withdrawal was completed in 2021 for excess contributions made in 2020, so they are expecting a 2021 1099-R from the brokerage that would indicate P (Excess contributions plus earnings taxable in previous year) in Block 7.

For the question on what qualifies as earnings, specifically it is the change in the value of the original contribution.  So, if the client had $5,000 in excess contributions, which then had a value of $5,500 when withdrawn, the "earnings" in this case are $500.  Typically the brokerage will calculate for the client the amount of earnings that should also be withdrawn in addition to the excess contribution.  However, if you need to make the calculation yourself, the IRS specifies this method:

((Adjusted Closing Balance - Adjusted Opening Balance) / Adjusted Opening Balance) X Excess Contribution

Adjusted means the true opening balance + the contributions made that year.  In other words, the IRS treats the contribution as if it was made immediately at the beginning of the year.  Here is an example:

Client has a Dec 31 2019 balance of $20,000 in their IRA.  During 2020 they contribute $5,000, but determine they have $2,000 in excess contributions due to income limitations.  At the end of 2020, the total value of the IRA is $30,000.  Using the formula above:

(($30,000 - $25,000) / $25,000) X $2,000 = $400, so the client should have $2,400 total removed from their account.  The $2,000 is treated as a non-taxable return of original Roth contribution, the $400 is treated as regular income and is subject to their prevailing tax rate, PLUS a 10% excise (penalty) on the $400, or $40 on top of the regular tax.

This caused the program to correctly calculate the tax and excise (penalty) on the earnings and generate Form 5329, but no tax on the return of original contribution (also correct).  My issue is I don't know if this is the RIGHT way to show this, and my concern is within the IRS system my client will now show they received a 1099-R, when in fact they won't receive one until next year for tax year 2021.

With all due respect to some previous poster's obvious expertise on all things Pro Series and the infinite number of posts made by them on just about everyone's questions, I note that poster did not actually answer the question about how specifically to solve the issue of HOW and WHERE to resolve this IN THE PRO SERIES PROGRAM.

Apologies for the length of this reply, but I truly hope this helps.

Chessie
Level 2

THANK YOU!

 

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qbteachmt
Level 15

"I note that poster did not actually answer the question about how specifically to solve the issue of HOW and WHERE to resolve this IN THE PRO SERIES PROGRAM."

Well, we put Links for you to click on and use. The 1099-R ProSeries help article is linked in this topic.

No one can force you to use it. Just like the Math links for computing the earnings is also in a bunch of the links I provided. But putting the text directly in your topic helps other people, because a lot of people never click any of the links provided that would be bookmarked as your permanent resource.

Because really, no one has time to retype something already found all over the web.

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Zazzy
Level 2

I actually read those FAQs and they also did not address this specific issue.  But thanks again for trying and needing to keep your voice out there.  Have a great day.

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qbteachmt
Level 15

"But thanks again for trying and needing to keep your voice out there. Have a great day."

All over this forum you find Peer Users who have been responding, because this is not Intuit Customer Support nor Tech Support. So, thanks for participating as just another Peer User, because that is why this community exists.

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DX_MB
Level 1

Not sure if all the questions above have been addressed, but I didn't see one potential solution mentioned.  For the 1099-R input screen, there is an "Other Information" tab where you can click the box "2021 Form 1099-R with distribution code P or R" to indicate that the 1099-R being reported is an anticipated 1099-R for 2021.  

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smetzel
Level 1

I also have a similar issue.  The pseudo 1099-R with codes 8 and J in box 7 created for earnings on excess ROTH IRA contribution is creating a higher modified AGI and therefore additional excess Roth IRA contributions (over and above what was already removed as an excess contribution).  Am I missing a software indication for earnings on Roth IRA distribution to not be included in modified AGI for the purposes of calculating excess contributions?

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qbteachmt
Level 15

"over and above what was already removed as an excess contribution"

Most times, people have excess in that they didn't qualify to contribute to Roth at all. It was a very good year for many investments, so it is possible that someone who tried to remove Partial Excess was making that computation based on MAGI that now has changed, because their excess and earnings becomes part of the MAGI. You still have time for another corrective distribution. Or, optionally, put that return on Extension, to have until Oct 15.

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