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the client did receive the 1099-R in time for the routine filing, in other words the excess contributions were in 2019, withdrawn in calendar year 2019, and received a 2019 1099-R in early 2020.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 So, if the client had $5,000 in excess contributions, which then had a value of $5,500 when withdrawn, the "earnings" in this case are $500. Typically the brokerage will calculate for the client the amount of earnings that should also be withdrawn in addition to the excess contribution.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.
