Where to report earnings on excess Roth IRA contribution

[artp]

Taxpayer made excess $7000 Roth IRA contribution in 2024. HIs MAJI exceeded $240,000 MFJ. The $7000 was reported on 5498. He will pulled out the $7000 prior to filing the return, but I need to report the earnings on the $7000 as taxable and 10% penalty does not apply. Did not see an input in Drake to do this. I have not gotten any help from tech support on this so do I just do a manual entry on line 8z of schedule 1? How to show the $7000 and then back it out to avoid IRS reporting issue? suggestions?

Art

[jklcpa]

Excerpt from the form 8606 instructions:
 

Return of IRA Contributions

If, in 2024, you made traditional IRA contributions or Roth IRA contributions for 2024 and you had those contributions returned to you with any related earnings (or minus any loss) by the due date (including extensions) of your 2024 tax return, the returned contributions are treated as if they were never contributed. 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 2024 and any related earnings on your 2024 Form 1040, 1040-SR, or 1040-NR, line 4a. Also include the related earnings on your 2024 Form 1040, 1040-SR, or 1040-NR, line 4b. Attach a statement explaining the distribution. Also, if you were under age 59½ at the time of a distribution with related earnings, you are generally subject to the additional 10% tax on early distributions (see Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, and its instructions).

 

[Terry D EA]

In Drake, to get the excess reported on form 1040 Line 4a, go to the income screen #3, put the excess amount on line 4a. Hope this helps.

[jklcpa]

^^ what Terry said, and the earnings returned goes on line 4(b).

[artp]

Reply all

I agree about the earnings on the $7000, but the contribution itself should not be reported anywhere on the return since the $7000 + earnings was returned before the tax due date. See below from Pub 590-A

"You won’t have to pay the 6% tax if you withdraw an excess contribution made during a tax year and you also withdraw any interest or other income earned on the excess contribution. You must complete your withdrawal by the date your tax return for that year is due, including extensions."

[jklcpa]

33 minutes ago, artp said:

Reply all

I agree about the earnings on the $7000, but the contribution itself should not be reported anywhere on the return since the $7000 + earnings was returned before the tax due date. See below from Pub 590-A

"You won’t have to pay the 6% tax if you withdraw an excess contribution made during a tax year and you also withdraw any interest or other income earned on the excess contribution. You must complete your withdrawal by the date your tax return for that year is due, including extensions."

No, that is only for discussing the 6% tax on excess contribs.  I agree that the 6% penalty does not apply.

In my original post, I gave you the direct instructions from form 8606 that tells you to include on 1040, line 4a the total withdrawn to correct this (the total of the excess+earnings).  Then, 1040 4b, include only the earnings.  The earnings withdrawn will be taxable, but not the excess contrib itself. Also, remember that it also tells you to attach a statement of explanation to the return.

In addition to the 8606 instructions I'd posted earlier, here is the snip from the instructions for 1040, lines 4a & b:

Quote

Lines 4a and 4b - IRA Distributions
Exception 2. If any of the following apply, enter the total distribution on line 4a and see Form 8606 and its instructions to figure the amount to enter on line 4b.
...
... Item #4 under that that says "if any of the following apply":
You had a 2023 or 2024 IRA contribution returned to you, with the related earnings or less any loss, by the due date (including extensions) of your tax return for that year.

 

[artp]

Judy,

 

Thanks for being patient with me on this.  I did not see how this was going to work until I made those entries. Brain was just not working.

Art