form 8606 basis question.

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2cents2
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form 8606 basis question.

Post by 2cents2 »

In 2015, I contributed $6500 to a traditional (non-deductible) IRA. I had a loss when it came time to convert, so the value at conversion was $6414.

2015 8606 line 5. $6500
line 13. $6414
line 14. $ 86

So, fast forward to 2016. The IRS 2016 8606 instructions say the basis is entered on Line 2 (The amount from line 14 of 2015 Form 8606).

I'm using turbotax. In the section that is titled, Let's Find Your IRA Basis, it says, "We transferred the total basis in 2cents2's traditional IRAs for all years through 2015. Correct the amount below, if needed." The field has $0 for my total basis (as of Dec 31, 2015). So, I changed it to $86 and then Turbotax says, "The IRA basis is different from the basis entered. Include a brief explanation as to why 2cents2's IRA basis changed with your return."

So, I feel like I am doing something wrong. Is the basis from a loss not allowed to be carried forward?
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retiredjg
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Re: form 8606 basis question.

Post by retiredjg »

Is the basis from a loss not allowed to be carried forward?
I wish we knew the definitive answer to this. Some people say "yes" and some people say "no". And it appears from what has been reported here that different software may give different answers.

In order to have a discussion about it, please answer a few questions.

Did you use TT last year to do your taxes?

Did TT generate a Form 8606 last year or did you do it by hand?

In general, did TT capture other information from last year's return accurately?
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Re: form 8606 basis question.

Post by 2cents2 »

retiredjg wrote:
Is the basis from a loss not allowed to be carried forward?
I wish we knew the definitive answer to this. Some people say "yes" and some people say "no". And it appears from what has been reported here that different software may give different answers.

In order to have a discussion about it, please answer a few questions.

Did you use TT last year to do your taxes?
Yes.
Did TT generate a Form 8606 last year or did you do it by hand?
TT generated form 8606 last year.
In general, did TT capture other information from last year's return accurately?
Yes.
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retiredjg
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Re: form 8606 basis question.

Post by retiredjg »

It seems to me if last year's TT generated Form 8606 says $86 left in basis on line 14, it should be bringing it over without regard to how the basis was generated (from a loss or not).

This is what I'd do (and you may have already done). Back up and erase everything that pertains to this one question. Save the return and shut down TT. Start over, download updates if there are any, and try again.

If it still refuses to populate line 2 on this year's form, I'd put it in by hand and assume it is a TT glitch. I would not even do the comment unless forced to. If forced to, I'd just say "from Line 14 of last year's Form 8606".

Oh yes, read the Form 8606 instructions for line 2 and see if there is some mystery discussed there.
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Re: form 8606 basis question.

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Topic moved to Personal Finance (Not Investing).
kaneohe
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Re: form 8606 basis question.

Post by kaneohe »

consider calling TT via a trusted number (not Google). Friend called them about a problem w/ FEIE. They somehow connected to his computer so they could see what he had done.......and found an input/status that caused the problem. They suggested something and problem was fixed.
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Re: form 8606 basis question.

Post by 2cents2 »

retiredjg wrote:It seems to me if last year's TT generated Form 8606 says $86 left in basis on line 14, it should be bringing it over without regard to how the basis was generated (from a loss or not).

This is what I'd do (and you may have already done). Back up and erase everything that pertains to this one question. Save the return and shut down TT. Start over, download updates if there are any, and try again.

If it still refuses to populate line 2 on this year's form, I'd put it in by hand and assume it is a TT glitch. I would not even do the comment unless forced to. If forced to, I'd just say "from Line 14 of last year's Form 8606".

Oh yes, read the Form 8606 instructions for line 2 and see if there is some mystery discussed there.
Thanks for your help. I did as you suggested and ran error checks and none came up. It solved the problem, except that nagging feeling... I know I'm not smarter than TT, so I'm going to go back to re-read the 8606 instructions.
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Re: form 8606 basis question.

Post by 2cents2 »

kaneohe wrote:consider calling TT via a trusted number (not Google). Friend called them about a problem w/ FEIE. They somehow connected to his computer so they could see what he had done.......and found an input/status that caused the problem. They suggested something and problem was fixed.
I'm not having any luck with finding a phone number through TT, but I'll keep looking. I always buy a CD from Costco every year so I don't have to register online. (I might be forced to register--which I don't like to do because I get bombarded with "offers" for all kinds of products and stuff. :oops: )
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retiredjg
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Re: form 8606 basis question.

Post by retiredjg »

2cents2 wrote: So, I feel like I am doing something wrong. Is the basis from a loss not allowed to be carried forward?
Since TT generated the Form 8606 with an amount on line 14 last year, apparently TT thinks there can be a basis that exists because of a loss, even when the entire IRA is converted. So your question is not really about the basis from the loss.

In this case, I think you were smarter than TT - by realizing it didn't do what it should have done. Glad to hear your problem is fixed. You'll probably never know why. :?
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Re: form 8606 basis question.

Post by tfb »

retiredjg wrote:
Is the basis from a loss not allowed to be carried forward?
I wish we knew the definitive answer to this. Some people say "yes" and some people say "no". And it appears from what has been reported here that different software may give different answers.
TurboTax apparently also said "no." It's not a bug. I'd go with it, consistent with the idea that you can't have basis in nothing.
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retiredjg
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Re: form 8606 basis question.

Post by retiredjg »

tfb wrote:
I wish we knew the definitive answer to this. Some people say "yes" and some people say "no". And it appears from what has been reported here that different software may give different answers.
TurboTax apparently also said "no." It's not a bug. I'd go with it, consistent with the idea that you can't have basis in nothing.
If TT said "no", why did it put $86 on line 14 from last year's form? Seems to me that is when it would have said "no" by putting $0 on line 14.
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Re: form 8606 basis question.

Post by tfb »

retiredjg wrote:
tfb wrote:
I wish we knew the definitive answer to this. Some people say "yes" and some people say "no". And it appears from what has been reported here that different software may give different answers.
TurboTax apparently also said "no." It's not a bug. I'd go with it, consistent with the idea that you can't have basis in nothing.
If TT said "no", why did it put $86 on line 14 from last year's form? Seems to me that is when it would have said "no" by putting $0 on line 14.
Just different ways in doing the same thing? Having a basis you can't carry over and having no basis to carry over end up at the same spot: no basis is carried over.
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retiredjg
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Re: form 8606 basis question.

Post by retiredjg »

But TT did in fact carry over the basis by putting $86 on line 14 even though the IRA was completely drained.

It's a conundrum, Harry. I consider you one of the brightest and most knowledgeable posters on the board, but I cannot seem to grasp your viewpoint on this issue. Its frustrating. And a little funny too at times.
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Re: form 8606 basis question.

Post by Alan S. »

This may have something to do with the misc itemized deduction allowed for closing all IRAs of the same type for less than basis.

The remaining basis (non deductible contributions minus distributions per Pub 590 A) of $86 could either continue in the empty TIRA or be used for the misc deduction (subject to 2% AGI floor possibly with other such misc deductions), but it obviously cannot be used for both purposes. However, the program should eliminate the deduction possibility once you select the standard deduction.

OP - I did not understand your final result with TTax. Did the program still 0 out the basis or did it bring it over to the 2016 8606?

This might turn out to another case for leaving $10 or so in the TIRA, not only to generate a Part I if you don't make a current year ND contribution, but also to eliminate IRA closure thereby eliminating the misc deduction.
Last edited by Alan S. on Sat Apr 08, 2017 2:19 pm, edited 1 time in total.
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Re: form 8606 basis question.

Post by tfb »

retiredjg wrote:But TT did in fact carry over the basis by putting $86 on line 14 even though the IRA was completely drained.

It's a conundrum, Harry. I consider you one of the brightest and most knowledgeable posters on the board, but I cannot seem to grasp your viewpoint on this issue. Its frustrating. And a little funny too at times.
As the OP showed just putting $86 on the previous year's form does not mean it's carried over to the following year. It only makes it potentially eligible for getting carried over. The following year's software looked at it and decided it isn't eligible for getting carried over because it's attached to nothing. The viewpoint is very simple: you have to have a basis in something. First you have something. Then you ask how much basis you have in it. When you have nothing, there's no point in asking how much basis you have in it. Outside of writing off a total loss, you can't have basis in nothing. It's very easy to maintain the basis. Just leave something to hold it. When you leave nothing you are saying the basis isn't important to you and you don't mind giving it up. It's not a unique viewpoint. I believe Alan S. sees it the same way.
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Re: form 8606 basis question.

Post by 2cents2 »

Alan S. wrote:This may have something to do with the misc itemized deduction allowed for closing all IRAs of the same type for less than basis.

The remaining basis (non deductible contributions minus distributions per Pub 590 A) of $86 could either continue in the empty TIRA or be used for the misc deduction (subject to 2% AGI floor possibly with other such misc deductions), but it obviously cannot be used for both purposes. However, the program should eliminate the deduction possibility once you select the standard deduction.

OP - I did not understand your final result with TTax. Did the program still 0 out the basis or did it bring it over to the 2016 8606?
.
So, when I changed the "0" in the questionaire to an 86, it populated line 2 with 86 just as the 8606 instructions say to do. It also required an explanation which I entered "line 14 of 2015 form 8606".

2016 8606:
Line 1. 6500
Line 2. 86
Line 3. 6586
Line 5. 6586
Line 13. 6541
Line 14. 45

Line 14. description: (this is your total basis in traditional IRAs for 2016 and earlier years)

There were no resulting errors when I did the final error check on TT.
These are the results that I expected. I thought this was a place holder to offset future gains. Or, was the mistake to do the conversion when I had a loss? Should one only do a conversion when there is no loss?
Last edited by 2cents2 on Sat Apr 08, 2017 4:50 pm, edited 1 time in total.
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FiveK
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Re: form 8606 basis question.

Post by FiveK »

tfb wrote:As the OP showed just putting $86 on the previous year's form does not mean it's carried over to the following year.
Except the IRS instructions seem unambiguous:
Image
Nothing about "the smaller of last year's line 14 or the amount left in the account" - simply take last year's line 14 and enter it in this year's line 2.

As for how TurboTax deals with this, see
Line 2, of Form 8606 - TurboTax Support and
Turbotax hasn't been carrying over my basis from previous years ... - TurboTax Support
in case either of those helps.
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Re: form 8606 basis question.

Post by 2cents2 »

FiveK wrote:

As for how TurboTax deals with this, see
Line 2, of Form 8606 - TurboTax Support and
Turbotax hasn't been carrying over my basis from previous years ... - TurboTax Support
in case either of those helps.
Thx-- Yes it does help. I did answer "yes" to tracking my non-deductible contributions (and I did not skip a year), so I don't know why it didn't auto-populate. It does make me feel a bit better that I'm not the only one to encounter this situation.
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Re: form 8606 basis question.

Post by Katietsu »

There was a thorough discussion of this a couple of months ago.

viewtopic.php?t=183782
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Re: form 8606 basis question.

Post by 2cents2 »

Katietsu wrote:There was a thorough discussion of this a couple of months ago.

viewtopic.php?t=183782
Thx, I'll check that out.
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Re: form 8606 basis question.

Post by tfb »

FiveK wrote:
tfb wrote:As the OP showed just putting $86 on the previous year's form does not mean it's carried over to the following year.
Except the IRS instructions seem unambiguous
If you left something in the IRA I bet TurboTax carries it over just fine. It's not like they don't know how to carry it over. Someone went out of their way to create a rule to do it sometimes and not do it some other times. We can argue they should've put zero in the previous year if they are not going to carry it over. For whatever reason they chose to defer the decision to the following year.

From the other thread, H&R Block software doesn't carry it over either. The chance of two different software having a bug at the same spot is far less than the chance of one software having a bug. The principle of occam's razor tells us the simplest explanation is just that you don't get to carry over any basis when you converted all, because there's nothing left afterwards.
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FiveK
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Re: form 8606 basis question.

Post by FiveK »

tfb wrote:The principle of occam's razor tells us the simplest explanation is just that you don't get to carry over any basis when you converted all, because there's nothing left afterwards.
Perhaps.

But the other edge of occam's razor says the IRS instructions are so simple and clear that they should be followed, even if one has to override the software.

This seems not much different than a capital loss carryover, that one may use from one year to the next even though the equity that sustained the loss is now completely gone.

If we go behind the IRS document to the US Code on which the IRS documents are based, IANAL but believe the following, from 26 U.S. Code § 408 - Individual retirement accounts | US Law | LII / Legal Information Institute applies:
(4) Individual required to report amount of designated nondeductible contributions
...
(B) Information required to be supplied The following information is described in this subparagraph:
...
(iii) The excess (if any) of—
(I) the aggregate amount of designated nondeductible contributions for all preceding taxable years, over
(II) the aggregate amount of distributions from individual retirement plans which was excludable from gross income for such taxable years.
There is nothing in this part of the US Code (if indeed this is the applicable wording) that says anything about losing the basis. Unless someone can find an IRS document or other US Code language that describes the conditions under which the basis goes away, it seems 2cents2 and anyone else in this situation should continue to follow the US Code excerpted above.

I.e., enter "the aggregate amount of designated nondeductible contributions for all preceding taxable years" minus "the aggregate amount of distributions from individual retirement plans which was excludable from gross income for such taxable years" on line 2 of Form 8606. In other words, take line 14 from the previous 8606 and put it on line 2 of this year's form.

Again, IANAL so if someone can point to different IRS or US Code language....
Last edited by FiveK on Sun Apr 09, 2017 2:25 am, edited 1 time in total.
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Re: form 8606 basis question.

Post by mudfud »

I'm having a similar issue with TurboTax.

This year I'm using TurboTax desktop, after having used TaxAct desktop the last few years. I have pesky $1 basis from 5 years ago that TaxAct carried forward on consecutive 8606s (Lines 2 and 14). Each year, my entire Traditional IRA was converted into a Roth, so the year-end balance was zero.

Now TurboTax correctly imported data from TaxAct including the $1 basis which now appears on Lines 2 and 14 on the 2016 8606. But TurboTax also places the $1 on Line 23 of Schedule A (Itemized Deductions) as "Loss from total distribution of all traditional IRAs". This indicates that TurboTax does not want the basis to be carried over, but claimed as loss. Now in my case this doesn't change my taxes (since the loss is well below the 2% threshold), but it does seem silly to claim a loss now from the five-year-old $1 basis.

Perhaps I should just let it go through, since there is no impact on my taxes. Or perhaps I should just change the $1 basis to 0 (but this would not follow the Form 8606 instructions that asks us to use the amount from Line 14 of the prior 8606).

Any thoughts? Thanks!
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tfb
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Re: form 8606 basis question.

Post by tfb »

FiveK wrote:This seems not much different than a capital loss carryover, that one may use from one year to the next even though the equity that sustained the loss is now completely gone.
If we follow that pattern we also know you have to deduct the capital loss up to the $3,000 limit every year. You don't get to choose to skip a year and save it for the future. In our case there is no limit to the IRA loss deduction when you liquidated all your IRAs for less than your basis. So 100% of the loss goes to the deduction. You don't get a choice to skip the deduction and carry it forward.
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FiveK
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Re: form 8606 basis question.

Post by FiveK »

mudfud wrote:Any thoughts?
Yes - that TaxAct was being more helpful than TurboTax is. ;)

For $1 it hardly matters. But for larger amounts that could be used to offset future gains in a traditional IRA, yet are too small to use as a miscellaneous deduction, it seems TurboTax is being harmful.
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FiveK
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Re: form 8606 basis question.

Post by FiveK »

tfb wrote:If we follow that pattern we also know you have to deduct the capital loss up to the $3,000 limit every year. You don't get to choose to skip a year and save it for the future.
Actually, you don't have to use any of the capital loss in a given year if your income is low enough. This is, unfortunately, a case one sees when an elderly person sold at a huge loss in 2008 and now lives primarily on SS income.

But back to the main point: do you see anywhere in IRS documents or the US Code where one should do anything other than take line 14 from the previous 8606 and put it on line 2 of this year's form?
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Re: form 8606 basis question.

Post by tfb »

FiveK wrote:
tfb wrote:If we follow that pattern we also know you have to deduct the capital loss up to the $3,000 limit every year. You don't get to choose to skip a year and save it for the future.
Actually, you don't have to use any of the capital loss in a given year if your income is low enough. This is, unfortunately, a case one sees when an elderly person sold at a huge loss in 2008 and now lives primarily on SS income.

But back to the main point: do you see anywhere in IRS documents or the US Code where one should do anything other than take line 14 from the previous 8606 and put it on line 2 of this year's form?
Only if your income is zero. As long as it's more than $3,000 you have to deduct $3,000. In our case the income is presumably larger than the $50 loss in the OP. To answer your question, on the 8606 form itself. "Complete this part only if one or more of the following apply." Therefore when none of the following applies, you lose the carryover. Not exactly the same as in the OP but it shows the chain can break.
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FiveK
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Re: form 8606 basis question.

Post by FiveK »

tfb wrote:
FiveK wrote:Actually, you don't have to use any of the capital loss in a given year if your income is low enough.
As long as it's more than $3,000 you have to deduct $3,000.
Said differently but it seems we agree. :)
To answer your question, on the 8606 form itself. "Complete this part only if one or more of the following apply." Therefore when none of the following applies, you lose the carryover. Not exactly the same as in the OP but it shows the chain can break.
I don't think so.

Note the 2016 Instructions for Form 8606:
Basis. Your basis in traditional IRAs is
the total of all your nondeductible contributions and nontaxable amounts included in rollovers made to traditional IRAs
minus
the total of all your nontaxable distributions, adjusted if necessary (see the instructions for line 2, later).
TIP
Keep track of your basis to
figure the nontaxable part of
your future distributions.
The IRS instructions match the US Code. Both say the basis carries over from year to year, correct?
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Re: form 8606 basis question.

Post by tfb »

FiveK wrote:Note the 2016 Instructions for Form 8606:
Basis. Your basis in traditional IRAs is
the total of all your nondeductible contributions and nontaxable amounts included in rollovers made to traditional IRAs
minus
the total of all your nontaxable distributions, adjusted if necessary (see the instructions for line 2, later).
TIP
Keep track of your basis to
figure the nontaxable part of
your future distributions.
The IRS instructions match the US Code. Both say the basis carries over from year to year, correct?
Unless it goes toward a deduction you can't refuse. Because the 8606 form called out 'part but not all' and you are only allowed a deduction when you take a full distribution from all IRAs, can we agree that 'withdrawing all' is a special case? In a special case the 'in general' part may not apply. Next we need to find out whether taking a deduction after a loss is optional. We already know it's not optional in case of capital loss unless your income is literally zero. Is there any case when you are allowed a deduction and you choose not to take it then you get to save it for the future? I know of none.
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Re: form 8606 basis question.

Post by mudfud »

FiveK wrote:
mudfud wrote:I'm having a similar issue with TurboTax.

This year I'm using TurboTax desktop, after having used TaxAct desktop the last few years. I have pesky $1 basis from 5 years ago that TaxAct carried forward on consecutive 8606s (Lines 2 and 14). Each year, my entire Traditional IRA was converted into a Roth, so the year-end balance was zero.

Now TurboTax correctly imported data from TaxAct including the $1 basis which now appears on Lines 2 and 14 on the 2016 8606. But TurboTax also places the $1 on Line 23 of Schedule A (Itemized Deductions) as "Loss from total distribution of all traditional IRAs". This indicates that TurboTax does not want the basis to be carried over, but claimed as loss. Now in my case this doesn't change my taxes (since the loss is well below the 2% threshold), but it does seem silly to claim a loss now from the five-year-old $1 basis.

Perhaps I should just let it go through, since there is no impact on my taxes. Or perhaps I should just change the $1 basis to 0 (but this would not follow the Form 8606 instructions that asks us to use the amount from Line 14 of the prior 8606).Any thoughts?
Yes - that TaxAct was being more helpful than TurboTax is. ;)
.
Ha! Now the $1 basis itself was generated by TaxAct many years ago because of a rounding error which I could not override ("divide line 5 by line 9"). The IRS recommends "at least 3" decimal places, and TaxAct used 4. If 6 decimal places had been used the rounding error would have been eliminated and the basis would have been $0. I've never used that $1 basis through all these years, with no impact on my taxes, but I think I'll manually get rid of it in this year's 8606.

Thanks,
Mud
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Re: form 8606 basis question.

Post by FiveK »

tfb wrote:Unless it goes toward a deduction you can't refuse. Because the 8606 form called out 'part but not all' and you are only allowed a deduction when you take a full distribution from all IRAs, can we agree that 'withdrawing all' is a special case?
Yes, I agree that the bullet point instructions on Part I of Form 8606 are unclear. E.g., one might ask why "part, but not all" applies to conversion but "took distributions" (in the second bullet) makes no distinction between total and partial distributions.

Looking at the instructions for Line 17, one can infer that Part I is useful when the amount converted is less than "all" current year nondeductible contributions plus the basis from previous years. In other words, it is useful when the amount converted is less than what goes (or would go) on line 3.
Next we need to find out whether taking a deduction after a loss is optional. We already know it's not optional in case of capital loss unless your income is literally zero.
Depends on the definitions of "income" and "literally". E.g., a couple age 65+ could have $24K from SS plus $12K from tIRA distributions (or other non-SS income) and still carry over the same capital loss from one year to the next.
Is there any case when you are allowed a deduction and you choose not to take it then you get to save it for the future? I know of none.
Well, the language in 2016 Publication 590-B - p590b.pdf is
If you have a loss on your traditional IRA investment, you
can recognize (include) the loss on your income tax re-
turn, but only when all the amounts in all your traditional
IRA accounts have been distributed to you and the total
distributions are less than your unrecovered basis, if any.
It says "can recognize," not "must recognize and must not carry over any unrecovered basis."

With both 26 U.S. Code § 408 - Individual retirement accounts | US Law | LII / Legal Information Institute and 2016 Instructions for Form 8606 - i8606.pdf supporting, and only one unclear bullet point on 2016 Form 8606 - f8606.pdf giving any pause, it does appear that retaining an unrecovered basis for tIRAs from one year to the next is correct.
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