Entering Form 8606 - Nondeductible Contributions to A Traditional IRA on the Desktop?
Form 8606 is used to report various IRA transactions which include:
- Nondeductible contributions to traditional IRAs
- Distributions from SEP, traditional, or Simple IRAs in case the taxpayer has some claim in these IRAs
- Conversion from SEP, traditional or SIMPLE IRAs to Roth IRAs
- Distributions from Roth IRAs
An IRA contribution becomes nondeductible when the contributed amount is more than the contribution limit permitted by law.
Why is it necessary to report nondeductible contributions to the IRS?
Nondeductible IRA contributions form a basis in an IRA Account. Based on the pro-rata share of the average value of all traditional IRA plans, taxable distributions are reduced by nondeductible contributions. Double taxation on the part of contributions which have already been taxed is prevented through reporting and tracking.
Every contribution made above the contribution limit results in an extra 6% penalty for every year the contribution is left in the IRA account. IRS contributions are inclusive of the average total of all the retirement contributions for a specific year. The additional tax is reported on Form 5329.
AGI and employer retirement plans limit contributions to traditional and Roth IRAs:
To report a nondeductible contribution to a traditional IRA in Taxx Savage Pro Program:
- Go to the Main Menu of the tax return (Form 1040)
- Then to Adjustments
- Select Nondeductible IRAs - If you are filing an MFJ return, indicate whether it is for the Taxpayer or their Spouse.
- Proceed to Traditional IRAs
- Then Nondeductible Contribution for 2020 - In case there is already an amount included, then it must be from the last line of the IRA Deductions Worksheet. Only select this line if you need to make an adjustment.
- Fill the remaining fields as required
- In the event that a taxable amount is displayed, you can make adjustments to the taxable amount on Form(s) 1099-R to match it.
Form 8606 is not to be used in reporting nondeductible Roth IRA contributions.
Note: This is not tax advice. It is a guide on how to enter nondeductible contributions to a traditional IRA into the Taxx Savage Pro Program.
Additional Information:
IRS: Instructions for Form 8606, Nondeductible IRAs
IRS: Retirement Topics - IRA Contribution Limits
IRS: Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs)
IRS: Topic No. 451 Individual Retirement Arrangements (IRAs)