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.
An IRA contribution is nondeductible if the amount contributed
exceeds the contribution limit established by law.
Why do I need to report nondeductible contributions to the IRS?
Nondeductible IRA contributions create a basis in an IRA account. Nondeductible contributions 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 contribution limit 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. View the phase out for each filing status here.
To report a nondeductible contribution to a traditional IRA in TaxSlayer Pro, from the Main Menu of the tax return (Form 1040) select:
- Adjustments
- Nondeductible IRAs - For MFJ returns, select Taxpayer or Spouse.
- Traditional IRAs
- Nondeductible Contribution for 20XX - if an amount is already included, it's flowing from the bottom line of the IRA Deductions Worksheet. Select this line only to make an adjustment if one is needed.
- Complete the remaining menu lines as needed.
- If a taxable amount is indicated, adjust the taxable amount on Form(s) 1099-R to match it.
Do not use Form 8606 to report nondeductible Roth IRA contributions.
Note: This is a guide on entering nondeductible contributions to a traditional IRA into the TaxSlayer Pro program. This is not intended as tax advice.
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)