Fixing 8606 error, understanding IRA basis

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praxis
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Joined: Sun Sep 06, 2009 1:51 pm

Fixing 8606 error, understanding IRA basis

Post by praxis »

By mistake, I underreported my total IRA value on last year's 8606. The amounts for my conversion and cost basis were correct. The error skewed the multiplier that calculates the taxable portion of the conversion resulting in about $11,000 in unreported income on my return (line 15). To fix this, do I amend the 2012 form 8606 AND file an amended return, paying the tax and penalty?

As I studied the form, it looks like the appreciation on the after-tax contributions are not taxed as I make distributions. The multiplier created by the ratio between pre and after tax bases is used to determine the taxable portion of the distributions (conversions). It seems like this calculation subtracts the after tax contribution basis and appreciation from taxable income.
HouseStark
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Re: Fixing 8606 error, understanding IRA basis

Post by HouseStark »

To correct the return, you would file a 2012 1040X amended return, and with that return attach the corrected Form 8606 and any other part of the original tax return that is changed by the amended return. If a form or schedule is not changed by the amended return, then it is not included with the 1040X.
HouseStark
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Location: Minneapolis, MN

Re: Fixing 8606 error, understanding IRA basis

Post by HouseStark »

praxis wrote: As I studied the form, it looks like the appreciation on the after-tax contributions are not taxed as I make distributions. The multiplier created by the ratio between pre and after tax bases is used to determine the taxable portion of the distributions (conversions). It seems like this calculation subtracts the after tax contribution basis and appreciation from taxable income.
No, that's not what it does. It is ratably allocating the non-taxable basis portion of the IRA value against the amount of the distribution. Look at the form and then see what would be the difference if your IRA had appreciated to a higher value. The result would be that the non-taxable exclusion would be smaller. It's not excluding the earnings from the contribution basis, though.
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praxis
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Re: Fixing 8606 error, understanding IRA basis

Post by praxis »

HouseStark wrote: No, that's not what it does. It is ratably allocating the non-taxable basis portion of the IRA value against the amount of the distribution.
thanks House Stark, but I'm still confused. What does it exclude then? Just the after tax basis?
kaneohe
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Re: Fixing 8606 error, understanding IRA basis

Post by kaneohe »

F8606 tracks your basis (nontaxable). Everything else......deductible contributions, appreciation on all contributions (whether deductible or not) are pretax and will be taxed when withdrawn.

You can think of the TIRA as a radiator with e.g. 4 qts of coolant(basis) and 6 qts of H20 (pretax contributions). After you run the engine a bit, the solution is all mixed up . If you withdraw any amount of liquid, 40% is coolant and 60% is H20. Ex: You withdraw 5 qts of liquid, you are withdrawing 2 qts of coolant and 3 qts of H20. You now have left 2 qts of coolant and 3 qts of H20.

You now add 11 qts of water (either contributions and/or appreciation). You now have 2 qts of coolant mixed with 14 qts of H20. Composition is now 1/8 coolant nd 7/8 water. If you withdraw 8 qts of liquid , you will draw 1 qt of coolant and 7 qts of water leaving you 1 qt of coolant (basis) and 7 qts of water.

You can repeat N times w/ different numbers till it makes sense. Also pls check the arithmetic above....could easily be errors
but hopefully you get the idea. If you start using odd number and getting fractions, it obscures the principles.
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