Amending Tax Return for 2020. Error on W-2 Gross Income

[lovetaxes]

A client contacted me to explain that one W-2 was reported, $600 short of actual amount received. Prepared a Form 1040X (federal) with the hopes of submitting the corrected return prior to 5/17/21. The Amended return displayed an additional adjustment. The taxpayer had made the maximum allowable IRA deduction (less than max), but due to the W-2 change, adding in $600 additional wages, the maximum IRA deduction was reduced by $210. The contribution had already been made, so now there was an excess payment.

Unfortunately, the taxpayer is away on business until May 23rd, so unable to get his signature to mail in by today (5/17). His CFP was willing to get his signature and move the $210 to be a 2021 IRA contribution but whereas the Amendment cannot be filed by the tax deadline, it appears that the overpayment will be reported on a Form 1099-R for excess contribution. 

The problem is that the excess would be taxable next year. However, the adjustment and tax on the excess is already considered when filing the Amendment. The client would get charged for the tax a second time in 2021 tax year, with the Form 1099-R.

Any suggestions would be gratefully received, as always.

Bob

[rbynaker]

You have a fundamental misunderstanding of how IRA contribution limits work.

If this were a Roth IRA then yes, an increase in Modified AGI could result in an excess Roth IRA contribution (subject to excise tax if not corrected timely).

For a Traditional IRA, however, an increase in MAGI does not alter the contribution limit. It simply changes the amount that is deductible on the 1040. An amount not deductible due to MAGI is not excess, is not subject to excise taxes, and does not need to be "corrected". It simply creates (or adds to) tax basis in the IRA which gets reported and accumulated over the years on Form 8606. Sounds like the only thing you need to do is include Form 8606 with the amended return.

Rick

[lovetaxes · Accepted solution]

Hello Rick,

You were right on. I'd love to blame it on a ridiculously busy end of tax season. This situation happened while I was working Saturday and Sunday to finish off returns for several late arriving clients and when my error on a W-2 came up and bit me, frustration took hold.

Had this occurred earlier I would have taken an alternative approach and adjusted the IRA to the amount that was deductible after the correction to the W-2. Whereas I didn't have time I went into tilt mode.

I've never been disappointed when seeking aid from the Lacerte Community. The Amended was Amended to include the Form 8606 and all is well in the world again. I wish you the best Rick.

Bob