"Are you also including the Form 8606 in your considerations?"

I do understand about 2022 contribution, and how that would be handled. No need to report it on 8606 if the contribution is withdrawn by the 2022 tax return due date. But need to report earnings on 2022 return if any. 

 "Don’t report the contribution or distribution on Form 8606 or take a deduction for the contribution. However, you must include the amount of the distribution of the returned contributions you made in 2022 and any related earnings on your 2022 Form 1040, 1040-SR, or 1040-NR, line 4a. Also include the related earnings on your 2022 Form 1040, 1040-SR, or 1040-NR, line 4b."

This is a problem. I just tested this in Proseries on 1040 2022. To be able to enter a returned contribution on 2022 line 4a, it wants me to complete a 1099-R. But we do not have a 1099-R and it won't be issued until 2023. 

"If you made a contribution for 2021 and you had it returned to you in 2022 as described above, don’t report the distribution on your 2022 tax return. Instead, report it on your 2021 original or amended return in the manner described above."

I have no idea why there is a need to amend. It would not change the bottom line. Whether we amend or file 5329 as stand alone to pay that 6% excise tax - it would result in the same outcome either way because we were wrong about the earnings for 2021. I read two articles confirming this. There is no need to compute or to withdraw or to report them at all. You do need to report earnings if it's a timely correction ( before tax deadline, would be the 2022 contribution in my case). You do not need to if the correction is untimely (after the tax due date, would be the 2021 contribution in my case). Then you only need to withdraw the excess distribution which will be treated as ordinary or early distribution (depends on the age). Check this out:

https://www.fidelity.com/retirement-ira/excess-ira-contributions

Her 2021 contribution will be untimely correction. So she is liable for the 6% excise tax for 2021 and for 2022 on that contribution. It says that earnings calculation is NOT required for untimely correction. However, what does that mean, the earnings stay in her account ? Even if she closes the account? 🤔 Or this is implying that you do not need to withdraw or to report it, but you can if you want, but then you will pay a 10% early withdrawal penalty on those earning since she is under 59?

And it says: "Tax reporting of untimely corrections : Untimely corrections must be reported as an early or normal withdrawal, depending on your age when you withdraw, using IRS Form 1099-R"

So this will be reported on 2023 1099-R and then we report it as such on 2023 tax returns? ( It will be "early withdrawal" due to her age)

It explains how you don't need to worry about earnings for untimely distribution  (which would be 2021 in my case). Which tells me that no need to amend 2021 returns since the only thing we need to worry about is the 6% excise tax for 2021 which can be paid by filing 5329 as stand alone. I however wonder, if we can just include that 6% excise tax for 2021 and for 2022 on her 2023 returns when a 1099-R arrives. It makes no difference if we pay that 6% excise tax via filing 5329 as stand alone for 2021 or if we include it on 2023 returns.

And here is another good article explaining this. Check out example 5. 

"Example 5: A single, 54-year-old taxpayer is not eligible to contribute to a Roth IRA in 2019 because his modified adjusted gross income exceeds the phaseout limit for those contributions. Nevertheless, the taxpayer mistakenly makes a $7,000 excess contribution in 2019 to a newly formed Roth IRA. The entire excess contribution constitutes after-tax investment in the Roth IRA.

In 2020, after the expiration of the time for making a corrective distribution, the Roth IRA's balance has grown to $7,700. The taxpayer then makes an ordinary distribution of $7,000 that is composed entirely of nontaxable investment and that eliminates the $7,000 excess contribution. The $700 of earnings is retained by the Roth IRA and is allowed to compound tax-free in future years. Unfortunately, the taxpayer must still pay excise tax of $420 for 2019 (6% of the $7,000 excess contribution)."

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

The article states: “If it is too late to make a corrective distribution, a taxpayer may be able to eliminate an excess contribution simply by making ordinary distributions. For a Roth IRA, the excess contribution is reduced by the entire amount of the distribution. In neither case is there a need to distribute the IRA income earned on the excess contribution.”

Let me know what you think now and what do you think is the easiest way to handle it. Seems, either filing 5329 as stand alone for 2021 or I hope, we can instead factor in that 6% excise tax into 2022 or 2023 returns and reconcile it with a 1099-R? The fidelity article explains that you will be issued a 1099-R reflecting all distributions.