8606

[tetertax]

I have a taxpayer that made a max Roth contribution for 2022 but was unable to make the contribution because of income limitations. The taxpayer also made a max contribution for 2023 before she filed her 2023 taxes. Her broker made a back-door recharacterization but not until March of 2023 for both 2022 and 2023. I have three 1099-R's. One is for the 2022 recharacterization, one is for the 2023 recharacterization and one is with a distribution code of 2 for the total of both (less a small loss on the funds). I am fairly certain that I need to amend her 2022 return and attach a 8606. However, I don't know how to handle any of this as all three 1099-Rs are dated January of 2023. 

[qbteachmt]

"are dated January of 2023"

They would be Form Year 2023, and the tax year would be part of the code(s), such as "P" for prior, if the broker knows or cares. That's because a 1099-R is for money Out. They don't always know what happened after this step. You also want Form 5498 for money In, as due diligence for what happened, and those will have the applicable tax year on them. Also, get the statements so you can confirm these were timely.

"made a back-door recharacterization"

"Back door" relates to conversion. "Recharacterization" isn't back door. It's one of the options for corrective action. Or, are you trying to describe both Recharacterized as nondeductible Traditional IRA, and then Converted (moved into the Roth as potentially taxable)? So, that's a bit confusing.

"but not until March of 2023 for both 2022 and 2023"

You didn't explicitly state it, but 2023 also is disallowed (doesn't qualify due to income limits)?

"I have three 1099-R's."

For the year(s) money was considered Out.

"One is for the 2022 recharacterization, one is for the 2023 recharacterization"

Do they have the same distribution code?

"and one is with a distribution code of 2 for the total of both (less a small loss on the funds)."

Net loss, or by year? Having a net loss at conversion, for two years, isn't the same as determining gain/loss at each year end.There are rules for how to handle if there is loss, and there are rules for how to handle if there is gain. Unless the recharacterization(s) is the exact same amount for each year, and there were no other funds and no earnings in the/any Trad IRA, SIMPLE IRA, and SEP IRA (they get aggregated), there is no taxable gain or penalty to consider. In other words, taking the corrective action can avoid penalty, but you still need to consider earnings.

Is this the chain events:

1099-R #1: 2022 not qualified to make contributions, left them in over year end, did a corrective action before 2023 filing due date (moved the money to a nondeductible Trad IRA contribution), so the 2022 tax return might be fine (the Roth IRA mistake would be moot). You need to review it.

1099-R #2: 2023 not qualified to make contributions, recharacterized in the year they were made, so the mistake also is moot. Gain needs to be considered.

Both tax filings should include Form 8606 as basis matters (nondeductible).

1099-R #3: Conversion from Trad IRA basis to Roth. Gain still needs to be considered. A net loss on specific amounts and years doesn't define back door tax free. Only for the exact same basis with no other funds in existence in similar accounts, will be tax free; any other commingled amounts means the entire conversion pro rata conversion.

This is why the 2022 tax form might be fine (you have to examine it):

"How late can you recharacterize a Roth contribution?

You have until the tax-filing deadline to complete a recharacterization. If you file an IRS extension, you have until the extended tax-filing deadline, normally October 15."

They may have done timely actions, eliminating penalties. Everything else is based on facts of each event.

[tetertax]

The first 1099-R has a code of R (Recharacterized contribution for 2022) for $5362.14. (Original 2022 max roth contribution of $6000). The second 1099-R has a code of N (Recharacterized contribution for 2023) for $6490.08. (Original 2023 max roth contribution of $6500). The third 1099-R has a code of 2 and is for $12,010.44. There was no gain. The 2022 contribution was made February 7, 2022 before the taxpayer filed their 2022 taxes. (She also did not report on her taxes that she made this contribution). She made her 2023 contribution in February of 2023. Then she realized that she had overcontributed for both 2022 and 2023. On March 6, 2023 her broker sent her three letters. One stated that the $6,000 had been recharacterized with a loss attributable to that sum in the amount of $663.88. One stated that the $6,500 had been recharacterized with a loss attributable to that sum in the amount of $41.42. The third letter stated that the broker had completed the irrevocable conversion to her Roth account "Cash and assets in the amount of $12,010.44 were converted for the 2023 tax year". 

Can you please provide me anymore guidance?

[qbteachmt · Accepted solution]

"Can you please provide me anymore guidance?"

Here are the instructions:

https://accountants.intuit.com/support/en-us/help-article/retirement-tax-credits-deductions/entering...

Enter each 1099-R and confirm the results on Form 8606 (for the 2022 recharacterization, for the 2023 recharacterization, as these will establish basis, and confirm you entered the 2023 conversion data properly, there should be no tax on the conversion). Just take it one step at a time.

If you want to understand it further, google this:

can i file form 8606 for a previous year

And:

https://www.investopedia.com/articles/retirement/03/092403.asp

[tetertax]

Thank you so much! I got it figured out. You are a lifesaver!