Fixing a basis mistake made in prior years on tax

Submitted by curbside319 t3_1239sfb in personalfinance

Situation below, quite confused how to resolve this.

  1. In 2020 I had a 403B that was rolled over into a traditional IRA. The rollover amount was $40,000. That year, it had gained value to $51,000.
  2. In 2021 I did a backdoor Roth conversion. I put $6000 in the traditional IRA and then converted that amount to a Roth IRA. This was my first ever contribution to the traditional IRA. I forgot about the pro-rata rule and when I submitted my 8606, I erroneously said that my traditional IRA basis was $0. To this day, I still have a traditional IRA which now has a value of $60K.
  3. In 2022, I'm trying to fix my mistake in 2021 and also calculate my correct basis.
    1. I don't know how to calculate my basis for 2021, which I need in order to not make the same mistake again. Can anybody tell me what it is based off of the data above?
    2. I don't know what literal steps I need to take to fix this. I think I'm supposed to fill out 1040-X to fix the error, but do I also need to attach a redo of 2021's form 8606?

Thanks! My brain is swirling trying to figure this out!

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DeluxeXL t1_jdttyue wrote

You need to redo your 2021 Form 8606. Just go through the form's part 1 and 2 and answer all questions. Once that's done, redo your entire tax return because you had taxable conversion that you didn't include, which changes Form 1040 line 4b and everything downstream. Compare the old and the new tax returns and fill out Form 1040X.

Mail the signed Form 1040X and 2021 Form 8606.

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curbside319 OP t1_jdtub7m wrote

Yes, but in that form, line 2 asks: "Enter your total basis in traditional IRAs." I do not know what I should fill out based on the above.

Also once I figure that out, I can fill out 8606 for year 2021. But for year 2022 I still need to do my taxes by the deadline, and its asking me for my basis from year 2021 (which is dependent on understanding how to fill out 2021's 8606).

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DeluxeXL t1_jdtuk4m wrote

>Yes, but in that form, line 2 asks: "Enter your total basis in traditional IRAs." I do not know what I should fill out based on the above.

If you have never made any nondeductible contribution for tax year prior to 2021, your IRA basis for 2020 and earlier (2021 Form 8606 line 2) is $0.

>Also once I figure that out, I can fill out 8606 for year 2021. But for year 2022 I still need to do my taxes by the deadline, and its asking me for my basis from year 2021

Your IRA basis for 2021 and earlier is on 2021 Form 8606 line 14 after you finish redoing the form correctly.

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curbside319 OP t1_jdtuwaq wrote

Thanks just to double confirm, even though I rolled over $40k into the traditional IRA in 2020 (but did not contribute money), the basis for that year and earlier is STILL just $0? For some reason, I thought that I have to account for that $40k somewhere as part of the Pro-Rata.

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DeluxeXL t1_jdtv58t wrote

>Thanks just to double confirm, even though I rolled over $40k into the traditional IRA in 2020 (but did not contribute money), the basis for that year and earlier is STILL just $0?

Yes. Only a nondeductible contribution raises IRA basis. Notice that I didn't say nondeductible IRA contribution. I said nondeductible contribution. i.e. it can come from both IRA and non-IRA. If you messed up and rolled over the contribution portion of after-tax 401k to traditional IRA, that was a nondeductible contribution. This would be the only rare case of non-IRA-based IRA basis.

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curbside319 OP t1_jdtwwes wrote

Ahh ok, I just did 2021's 8606 form exercise and line 14 came out to be ~$5500. Then let me know if this is correct...

You said I should "Once that's done, redo your entire tax return because you had taxable conversion that you didn't include, which changes Form 1040 line 4b and everything downstream. Compare the old and the new tax returns and fill out Form 1040X.
Mail the signed Form 1040X and 2021 Form 8606."

Can I do the above and then also submit my 2022 taxes in parallel given that now I know that my 2021 basis was $5500 and that unblocks me from finishing up my 2022 taxes?

Also just curious do you think I'm in for a sizable IRS penalty based on the error? Should I write a note to them and say it was an accident and hope they will be lenient? My first time ever having this happen...

Thanks so much, appreciate all this

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DeluxeXL t1_jdtz0bg wrote

>Can I do the above and then also submit my 2022 taxes in parallel given that now I know that my 2021 basis was $5500 and that unblocks me from finishing up my 2022 taxes?

Yes.

>Also just curious do you think I'm in for a sizable IRS penalty based on the error?

No idea. Pay the tax you can calculate and wait for the late bill.

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