Form 8606 is a multi-purpose form for reporting IRA transactions, specifically,
- Nondeductible contributions made to traditional IRAs;
- Distributions from traditional, SEP, or SIMPLE IRAs, if the taxpayer has basis in these IRAs;
- Conversions from traditional, SEP, or SIMPLE IRAs to Roth IRAs; and
- Distributions from Roth IRAs.
Why do I need to report Non-Deductible Contributions to the IRS?
Non-deductible IRA Contributions create a basis in an IRA account. Any non-deductible contributions will reduce taxable distributions based on the pro-rata portion of the aggregate value of all Traditional IRA plans. Reporting and tracking prevent double taxation on the portion of contributions for which the taxpayer has already paid income taxes.
Taxpayers need to be aware that any contributions over the prescribed contribution limit will incur an additional 6% penalty for each year the contribution remains in the IRA account. IRS contribution limits include the aggregate total of all contributions toward retirement for a given year. The additional tax is figured on Form 5329.
Contributions to Traditional IRAs and to Roth IRAs are limited based on AGI and employer retirement plans:
|FILING STATUS||2021 AGI LIMITS|
|ROTH IRA DEDUCTION
|MFJ / Qualifying Widow(er)||$105,000||$125,000||$198,000||$208,000|
|*MFS may qualify for same AGI limits as Single/HOH provided that they did not live with spouse at any time during tax year.|
To report a nondeductible contribution to a traditional IRA in TaxSlayer Pro, from the Main Menu of the tax return (Form 1040) select:
- Nondeductible IRAs - For MFJ returns, select Taxpayer or Spouse.
- Traditional IRAs
- Nondeductible Contribution for 2020 - if an amount is already included, it's flowing from the bottom line of the IRA Deductions Worksheet. If an adjustment is needed, enter the amount of the adjustment.
Reminder: Do not use Form 8606 to report nondeductible Roth IRA contributions.
Note: This is a guide on nondeductible contributions to a traditional IRA into the TaxSlayer Pro program. This is not intended as tax advice.