Harry Sit's Blog, page 10
January 29, 2024
2023 Self-Employed ACA Health Insurance Subsidy In H&R Block
Updated on January 29, 2024, with updated screenshots from H&R Block software for tax year 2023. If you use TurboTax, see:
Self-Employed ACA Health Insurance Subsidy and Deduction In TurboTaxMany self-employed business owners buy health insurance from the Affordable Care Act (ACA) healthcare marketplace. Self-employed health insurance premiums are tax-deductible. When your income is low enough, you can also receive a subsidy in the form of a premium tax credit. The tax deduction and the subsidy form a circular relationship. The math is difficult to do by hand but tax software easily handles it for most people.
Use H&R Block Downloaded SoftwareThe screenshots below are taken from H&R Block downloaded software. The downloaded software is way better than online software. If you haven’t paid for your H&R Block Online filing yet, consider buying H&R Block download software from Amazon, Walmart, Newegg, and many other places. If you’re already too far in entering your data into H&R Block Online, make this your last year of using H&R Block Online. Switch over to H&R Block download software next year.
Self-Employment IncomeYou should enter all your self-employment income and expenses into the software before you start doing health insurance related to your self-employment.
Self-Employed Health InsuranceI’m using this scenario as an example:
You are single, self-employed, with no dependent. You had health insurance from the ACA healthcare marketplace for all 12 months in the year. The second lowest cost Silver plan was $600/month. The full unsubsidized premium for the plan you chose was $500/month. Based on your estimated income, you got a $150/month advance credit. You paid net $350/month out of pocket.
Go to Federal -> Adjustments -> Self-Employed Health Insurance.
Enter the full unsubsidized premiums for your health insurance in the year. You find this number on the 1095-A form you receive from the ACA healthcare marketplace (line 33, column A). Include both what you paid out of pocket and the advance premium credit paid by the healthcare marketplace. You will reconcile the advance credit later.
If you also paid premiums for dental and vision insurance, add those as well. We don’t have dental and vision premiums in our example.
Right now it says 100% of your premium is deductible. It’ll change after you enter more information from your 1095-A form.
Enter 1095-A
Go to Federal -> Taxes -> Health Care Coverage.
Everyone had insurance in our example.
Check the box for a plan from the ACA healthcare marketplace.
We don’t have any of these unique situations here. Check the box for Alaska or Hawaii if you lived there.
We need to add the 1095-A from the ACA healthcare marketplace.
Enter the information as requested. Scroll down to Part III. The numbers on our 1095-A are the same for all 12 months and correct in our example. If you have different numbers for some months, choose ‘No’ and enter the month-by-month numbers from your Form 1095-A.
Enter the monthly amounts from the 1095-A. The full unsubsidized premium was $500/month. The full unsubsidized premium for the second lowest cost Silver plan was $600/month. The ACA healthcare marketplace paid $150/month in advance subsidy to the insurance company on our behalf.
We only have one 1095-A form in our example. If you have more than one, repeat and add them all.
Which months you were self-employed determines how much counts as deductible self-employed health insurance. We were self-employed in all 12 months in our example.
The software crunches the numbers. It says we are eligible for more premium tax credit than the advance subsidy the ACA healthcare marketplace already paid to the insurance company.
Self-Employed Health Insurance DeductionWe’re eligible for a tax deduction on the amount not covered by the re-calculated premium tax credit.
You can verify how much you are receiving a tax deduction. Click on Forms at the top. Double-click on Form 1040 and Schedules 1-3. Scroll down to Schedule 1 and look at line 17. That’s your self-employed health insurance deduction.
Premium Tax Credit
Close Form 1040 and Schedules 1-3 and find Form 8962 in the forms list. Double-click on it.
Scroll down to Line 24 on Form 8962. That’s our premium tax credit based on our actual income. Because we received less in advance subsidy, we’re getting the difference in our tax refund. If you received more in advance subsidy, you’ll have to pay back the difference (subject to a cap, see Cap On Paying Back ACA Health Insurance Subsidy Premium Tax Credit).
$1,388 in self-employed health insurance deduction plus $4,612 in premium tax credit equals $6,000. That’s the total unsubsidized premium for our health insurance (plus any dental and vision insurance premium, which we didn’t have in our example). The numbers add up!
The software figured out the split between the tax deduction and the tax credit. It also matched the result from TurboTax for the same example. This is where software does its best. If you take this to a tax professional, they will have to use their software to calculate the split anyway. I bet they aren’t able to do it by hand.
Edge CasesTax software works for most cases but it doesn’t work for everyone. You know you’re running into one of the edge cases for which the tax software doesn’t work when the numbers from the software fail this equation (except for a small difference due to rounding):
Self-Employed Health Insurance Deduction + Premium Tax Credit = Unsubsidized Health Insurance Premium (including any dental and vision premiums)
When this happens, you need a better calculator. See When TurboTax and H&R Block Give Self-Employed Wrong ACA Subsidy.
Learn the Nuts and Bolts
I put everything I use to manage my money in a book. My Financial Toolbox guides you to a clear course of action.Read ReviewsThe post 2023 Self-Employed ACA Health Insurance Subsidy In H&R Block appeared first on The Finance Buff.
2023 Self-Employed ACA Health Insurance Subsidy In TurboTax
Updated on January 29, 2024 with screenshots from TurboTax Deluxe downloaded software for 2023 tax filing. If you use H&R Block tax software, please read:
Self-Employed ACA Health Insurance Subsidy In H&R Block SoftwareMany self-employed business owners buy health insurance through the ACA healthcare marketplace (healthcare.gov or a state-specific exchange). If your estimated income qualifies for a subsidy, the marketplace will pay part of the premium directly to the insurance company.
Table of ContentsCircular RelationshipUse TurboTax DownloadSelf-Employment IncomeEnter 1095-ALink to Self-EmploymentCalculation ResultSelf-Employed Health Insurance DeductionS-Corp ShareholderPremium Tax CreditEdge CasesCircular RelationshipHowever, the advance subsidy is only an estimate based on the income estimate you provided when you signed up. As self-employed people know full well, the actual income from self-employment can vary greatly from year to year.
After the year is over, you have to square up and calculate the actual subsidy you qualify for. If your business didn’t do as well as you anticipated, you may qualify for a higher subsidy. If you had a great year, you may have to pay back some of it.
If you’re self-employed, you also qualify for a tax deduction for the health insurance premium. If you qualify for both a subsidy and a deduction, they form a circular relationship.
The IRS prescribed a method to calculate the split between the subsidy and the deduction. It’s difficult to calculate by hand but tax software will take care of it for most people.
Use TurboTax DownloadThe screenshots below are from TurboTax Deluxe downloaded software. The downloaded software is way better than online software. If you haven’t paid for your TurboTax Online filing yet, you can buy TurboTax download from Amazon, Costco, Walmart, and many other places and switch from TurboTax Online to TurboTax download (see instructions for how to make the switch from TurboTax).
We will use this scenario as an example:
Self-Employment IncomeYou are single, self-employed, with no dependent. You had health insurance through the ACA healthcare marketplace for all 12 months in the year. The full unsubsidized preimium for the second lowest cost Silver plan was $600/month. The full unsubsidized premium for the plan you chose was $500/month. Based on your estimated income, you got a $150/month advance credit. You paid net $350/month.
You should enter all your self-employment income and expenses into TurboTax before you start doing health insurance related to your self-employment.
TurboTax offers you to upgrade to the Home & Business edition but the Deluxe edition of TurboTax download software works just fine for a simple service business.
Enter 1095-A
Go to Federal Taxes -> Deductions & Credits. Scroll down and find Affordable Care Act (Form 1095-A) under Medical.
You should have a Form 1095-A from the ACA healthcare marketplace. If you didn’t get it in the mail, log in to your online account and look for a document download.
Enter the premium numbers from your Form 1095-A. If the numbers are the same for all months, enter the row for January and click on the Copy button next to it. It will put the same numbers for all other months.
The first column is the full unsubsidized monthly premium for your plan. The middle column is the full unsubsidized premium of the second lowest-cost Silver plan, which is used to calculate your subsidy. The last column is the advance subsidy the ACA marketplace already paid on your behalf to the insurance company.
Link to Self-EmploymentYou get a tax deduction only when the insurance is linked to self-employment. TurboTax doesn’t know it only from the 1095-A form. You have to tell TurboTax it’s linked to your self-employment.
This is important but easy to miss. Even though TurboTax knows you’re self-employed and you have the 1095-A form from the ACA healthcare marketplace, you still must check this box.
Associate the health insurance with your self-employment. Choose the partnership or the S-Corp option if your business income is from a partnership or an S-Corp. Say during which months you had business income.
If you have more than one Form 1095-A, repeat and add them all. We only have one in our example.
Calculation Result
TurboTax crunches the numbers in a split second. It says we’re eligible for more tax credit than the ACA healthcare marketplace already paid directly to the insurance company. We’ll get the difference in our tax refund.
If you qualify for less subsidy than the advance already paid, you’ll pay back the difference, subject to a cap (see Cap On Paying Back ACA Health Insurance Subsidy Premium Tax Credit).
Self-Employed Health Insurance DeductionWe’re also eligible for a tax deduction for the portion not covered by the premium tax credit.
To see your self-employed health insurance deduction, click on Forms on the top right. Find Schedule 1 in the left navigation pane. Look at Line 17. It shows we’re getting a $1,388 tax deduction for self-employed health insurance.
S-Corp ShareholderIf you’re a greater-than-2% shareholder of an S-Corp, you’re eligible for a tax deduction for the health insurance premium paid by the S-Corp, which is added to your W-2 as wages.
If you don’t see the self-employed health insurance deduction above, you need to enter a Schedule K-1 from the S-Corp.
Go to the Schedule K-1 from the S-Corp. Create a dummy K-1 even if you didn’t take any distribution from the S-Corp.
Be sure to check the box “I personally paid health insurance …” even if the S-Corp paid it directly.
Enter the Medicare Wages from Box 5 of your W-2 from the S-Corp. Read the note carefully. Leave the second box blank if the S-Corp only paid for an ACA marketplace health insurance policy. Enter a number for any policy paid outside the ACA marketplace, such as any dental or vision premiums.
Premium Tax Credit
To see the subsidy you qualify for based on your actual income, find Form 8962 in the forms list navigation pane. Scroll down and look at Line 24. When you’re done looking for the form, click on Step-by-Step on the top right to get back to the interview.
$1,388 in self-employed health insurance tax deduction plus $4,612 in premium tax credit equals $6,000 ($500/month), which is the full unsubsidized premium for our health plan (plus any dental and vision insurance premium, which we didn’t have in our example). The numbers add up!
TurboTax figured out the split between the tax deduction and the tax credit. It also matched the result from H&R Block software for the same example.
Edge CasesTurboTax works for most cases but it doesn’t work for everyone. You know you’re running into one of the edge cases for which the software doesn’t work when the numbers from the software fail this equation (except for a small difference due to rounding):
Self-Employed Health Insurance Deduction + Premium Tax Credit = Unsubsidized Health Insurance Premium (including any dental and vision premiums)
When this happens, you need a better calculator. See When TurboTax and H&R Block Give Self-Employed Wrong ACA Subsidy.
Learn the Nuts and Bolts
I put everything I use to manage my money in a book. My Financial Toolbox guides you to a clear course of action.Read ReviewsThe post 2023 Self-Employed ACA Health Insurance Subsidy In TurboTax appeared first on The Finance Buff.
January 28, 2024
How to Enter 2023 Foreign Tax Credit Form 1116 in H&R Block
[Updated on January 28, 2024 with updated screenshots from H&R Block software for 2023 tax filing.]
When mutual funds and/or ETFs that invest in foreign countries receive dividends or interest, they have to pay taxes to those countries. These mutual funds and/or ETFs report to your broker after the end of the year how much they paid in foreign taxes on your behalf.
When you invest in these mutual funds and/or ETFs outside a tax-advantaged account, your broker will report to you the total foreign taxes you paid through all your funds and/or ETFs. The IRS allows a tax credit for the taxes you paid indirectly to foreign countries.
Table of ContentsForm 1116Use H&R Block Download1099-DIV EntriesForeign Tax CreditAMT Simplified ElectionForeign-Source IncomeAdjustment ExceptionForeign TaxesVerify on Schedule 3Excess Foreign Tax CreditSummaryForm 1116The foreign taxes paid are reported in Box 7 on the 1099-DIV form you receive from your broker. It’s easy to handle when the total foreign taxes paid from all your 1099-DIV forms is no more than a certain amount — $300 for single and $600 for married filing jointly. You enter the 1099-DIV forms into your tax software and the software will automatically put the total on your tax form (Schedule 3, Line 1).
When your total foreign taxes paid from all your 1099-DIV forms are over the $300/$600 threshold, you’ll need to include Form 1116 in your tax return. I’ll show you how to do this in H&R Block software.
If you use other tax software, please read:
How to Enter Foreign Tax Credit Form 1116 in TurboTaxUse H&R Block DownloadThe following screenshots came from H&R Block downloaded software. The downloaded software is both less expensive and more powerful than H&R Block’s online software.
If you haven’t paid for your H&R Block Online filing yet, consider buying H&R Block download software from Amazon, Walmart, Newegg, and many other places. If you’re already too far in entering your data into H&R Block Online, make this your last year of using H&R Block Online. Switch over to H&R Block download software next year.
I’ll use the same example:
1099-DIV EntriesYou received a 1099-DIV from your broker. Box 7 “Foreign Tax Paid” on the 1099-DIV shows $700. 100% of this $700 came from a mutual fund or ETF. You only have this one 1099-DIV that has a number in Box 7.
If you import your 1099-DIV forms, double-check the import to make sure all the numbers match your downloaded copies. If you’re entering the 1099-DIV forms manually, type the numbers as shown on your forms.
H&R Block doesn’t say anything about the foreign tax paid or needing a Form 1116 after you enter the 1099-DIV forms. Just continue with your other entries.
Foreign Tax Credit
Foreign Tax Credit comes up much later in the Credits section under Foreign Tax Credit.
Click on “Add Form 1116.”
AMT Simplified Election
If this is the first year you’re claiming the Foreign Tax Credit, H&R Block software asks upfront about the simplified election. Select “Yes” for the simplified election.
Foreign-Source Income
Dividend income falls under “passive income.”
The “learn more” popup says you should choose “RIC” as the country when your foreign income came through mutual funds and/or ETFs. “RIC” is the last item in the country dropdown.
You get the foreign income from the supplemental information in your 1099 package from your broker. If you have multiple 1099-DIV forms that reported foreign tax paid in Box 7, you’ll have to add up the foreign income numbers from the respective supplemental information.
Don’t overlook the small note under the gross income input. It says you might need to adjust the amount if it includes foreign capital gains or qualified dividends. When you’re reporting foreign taxes paid from mutual funds and ETFs, the income sure does include qualified dividends. H&R Block doesn’t do the adjustment for you. It asks you to read the IRS instructions, learn how to adjust, and report the adjusted income here. That’s lazy.
Adjustment ExceptionFortunately, many people qualify for an adjustment exception. From the IRS Form 1116 Instructions:
You qualify for the adjustment exception if you meet both of the following requirements.
1. Line 5 of the Qualified Dividends and Capital Gain Tax Worksheet doesn’t exceed:
a. $364,200 if married filing jointly or qualifying widow(er),
b. $182,100 if married filing separately,
c. $182,100 if single, or
d. $182,100 if head of household.
2. The amount of your foreign source capital gain distributions, plus the amount of your foreign source qualified dividends, is less than $20,000.
The dollar amounts in the first requirement correspond to the top of the 24% bracket. You are spared from figuring out how to adjust if your taxable income minus your qualified dividends and long-term capital gains isn’t in the 32% tax bracket or above, and your foreign source capital gain distributions and qualified dividends aren’t $20,000 or more.
If you’re eligible for the adjustment exception and you decide to take the easy route of not adjusting your foreign-source income, you need to claim a corresponding adjustment exception on your total income.
Click on Forms on the top right. Open Form 1116. Scroll down and find Mini-Worksheet for Line 18 just above Line 18. Check the box for using the adjustment exception.
Close the form and return to the interview.
If you don’t qualify for the adjustment exception, good luck learning how to adjust from the Form 1116 instructions. You’re better off switching to TurboTax, which does the adjustment for you when you need it. See How to Enter Foreign Tax Credit Form 1116 in TurboTax.
We leave this blank because we don’t have any interest expenses.
If you have any above-the-line deductions, such as an early withdrawal penalty from breaking a CD or an HSA contribution made outside payroll, enter the total here. We leave this blank in our simple example because we don’t have those deductions.
We don’t have any direct expenses either.
We have no losses to adjust.
Yes, our 1099-DIV was reported in U.S. dollars.
Foreign Taxes
I chose the simpler “paid” method. Although the “Date paid or accrued” asks for a date in “MM/DD/YYYY” format, you can type “1099 TAXES” to indicate that the foreign taxes were paid on various dates through the 1099 forms. Enter the total foreign tax paid into the Dividends box.
If you have multiple 1099-DIV forms that reported foreign tax paid in Box 7, you’ll have to add up those numbers yourself. I wish the software did the math and auto-populated this field.
All our foreign taxes paid were through mutual funds and ETFs. RIC is the only country to use. We don’t have foreign income from any other countries.
Fortunately, we don’t have any carryover or carryback. If we can’t get 100% credit for the foreign taxes paid this year, we’ll have to create a carryback or carryover, which means we can’t e-file with H&R Block.
We don’t have any reduction either.
We don’t know what the foreign tax rate was. We’re leaving this blank.
We don’t know how to adjust. We’re leaving it blank again.
This is getting ridiculous. All I want is to get the foreign tax credit!
We’re finally done with Form 1116. Are we getting the credit?
Verify on Schedule 3
Click on Forms on the top. Double-click on Form 1040 and Schedules 1-3.
Scroll down to Schedule 3. Line 1 shows our foreign tax credit. You can also look at Form 1116. It looks awfully complicated.
Excess Foreign Tax CreditWe received 100% of the foreign taxes paid as a tax credit in our example. If you paid higher foreign taxes on a lower US income, you may not be able to take 100% of the credit. You’ll have to wait until next year to take the rest of it.
Carrying over part of the credit to the following year requires filing a Form 1116 Schedule B. H&R Block doesn’t have this form in their program. H&R Block tells you to download the form from the IRS website, complete it yourself, and attach it to your paper return. That’s ridiculous.
SummaryH&R Block software works when you paid more in foreign taxes than the $300/$600 threshold that requires a Form 1116. You’ll have to gather the foreign income and the foreign dividends from the 1099 supplemental information from your brokers. After it’s all said and done, you’re getting a tax credit for taxes you paid to foreign countries through your mutual funds and/or ETFs.
H&R Block asks you to add up the foreign tax numbers yourself. It asks you to make any necessary adjustments to the foreign-source income, which is quite difficult. The option to activate the adjustment exception is hidden in the Forms mode. You’re on your own when you don’t qualify for the adjustment exception. It also asks you to handle any carryover yourself.
TurboTax does a better job of handling the foreign tax credit than the H&R Block software. See Foreign Tax Credit Form 1116 in TurboTax.
It’s better to avoid the complicated Form 1116 altogether next year by putting your international mutual funds and ETFs in a tax-advantaged account. See Too Much Hassle in Claiming Foreign Tax Credit on IRS Form 1116.
Learn the Nuts and Bolts
I put everything I use to manage my money in a book. My Financial Toolbox guides you to a clear course of action.Read ReviewsThe post How to Enter 2023 Foreign Tax Credit Form 1116 in H&R Block appeared first on The Finance Buff.
How to Enter 2023 Foreign Tax Credit Form 1116 in TurboTax
[Updated on January 28, 2024 with updated screenshots from TurboTax for 2023 tax filing.]
When mutual funds and/or ETFs that invest in foreign countries receive dividends or interest, they have to pay taxes to those countries. These mutual funds and/or ETFs report to your broker after the end of the year how much they paid in foreign taxes on your behalf.
Table of ContentsForm 1116Use TurboTax Download1099-DIV EntriesForeign-Source IncomeSimplified Limitation for AMTAdjustmentsForeign Taxes PaidVerify on Schedule 3Excess Foreign Tax CreditSummaryForm 1116When you invest in these mutual funds and/or ETFs in a regular taxable brokerage account, your broker will report to you the total foreign taxes you paid through all your funds and/or ETFs. The IRS allows a tax credit for the taxes you pay indirectly to foreign countries.
The foreign taxes paid are reported in Box 7 on the 1099-DIV form you receive from your broker. It’s easy to handle when the total foreign taxes paid from all your 1099-DIV forms is no more than a certain amount — $300 for single and $600 for married filing jointly. You enter the 1099-DIV forms into your tax software and the software will automatically put the total on your tax form (Schedule 3, Line 1).
When your total foreign taxes paid from all your 1099-DIV forms are over the $300/$600 threshold, you’ll need to include Form 1116 in your tax return. It’s a complicated form. I’ll show you how to do this in TurboTax.
If you use other tax software, please read:
How to Enter Foreign Tax Credit Form 1116 in H&R BlockUse TurboTax DownloadThe screenshots below came from TurboTax Deluxe downloaded software. The downloaded software is way better than online software because it’s both less expensive and more powerful. If you haven’t paid for your TurboTax Online filing yet, you can buy TurboTax download from Amazon, Costco, Walmart, and many other places and switch from TurboTax Online to TurboTax download (see instructions for how to make the switch from TurboTax).
I’ll use this simple scenario as an example:
1099-DIV EntriesYou received a 1099-DIV from your broker. Box 7 “Foreign Tax Paid” on the 1099-DIV shows $700. 100% of this $700 came from a mutual fund or ETF. You only have this one 1099-DIV that has a number in Box 7.
If you imported your 1099’s, double-check that all the numbers from the import match your downloaded copy.
If you’re entering your 1099-DIV manually, you have to check a box on the 1099-DIV entry screen to reveal the additional input fields. Then you put the foreign tax paid number into Box 7.
We don’t have any of these uncommon situations.
After you’re done with one 1099-DIV, continue with your other 1099-DIV forms. We only have one 1099-DIV form in our example.
Foreign-Source Income
At a much later point, TurboTax will ask you about the foreign tax paid under Deductions & Credits -> Estimates and Other Taxes Paid -> Foreign Taxes.
After a brief introduction, the first question is whether you’d like to take a tax deduction or a tax credit. The “help you decide” popup says in general you’re better off taking the credit. So click on “Take a Credit.”
Next, TurboTax asks you which countries you received dividend income from. A small note says to select RIC for any income received from a mutual fund or other Regulated Investment Company. U.S.-based mutual funds and ETFs fall into this category.
RIC is the first item in the country dropdown.
Then you report income received from the country “RIC.” Click on “Report Income.”
Now you say foreign tax paid from which 1099-DIVs were paid to the country RIC. If all your foreign taxes paid were from mutual funds and/or ETFs, select all your 1099-DIV’s that have a number in Box 7.
TurboTax asks you how much of the dividend on your 1099-DIV was from foreign countries.
This information isn’t on the 1099-DIV itself. Your broker may have included supplemental information with the 1099-DIV. For instance, Fidelity provides the breakdown of total foreign income in its 1099 package.
TurboTax asks whether you’d like to review the 1099-DIV forms you entered before. We answer “No” here because we already entered the 1099-DIV forms correctly.
Simplified Limitation for AMT
Now it asks you about a “simplified foreign tax limitation election.” If this is the first year you encounter this, choose the first option.
TurboTax suggests you should elect the simplified method. Click on Elect Simplified Calculation.
If you used TurboTax last year and you already elected the simplified method, TurboTax reminds you that you should continue with the simplified method. Answer “Yes” here.
Adjustments
This is important but easy to miss. Click on “No” to trigger more questions. We gave the total foreign-source income in a previous screen but we didn’t get a chance to say how much of the income is from qualified dividends or long-term capital gains. It makes a difference.
Dividends fall in the Passive Income type.
You find the total foreign-source qualified dividends and long-term capital gains from the 1099 supplemental materials from your broker.
Go with the default “Paid.”
By default all your above-the-line deductions are categorized as “not definitely related” to your foreign income. If you have a deduction that’s definitely related to your U.S. income, such as the deductible 1/2 of your self-employment tax when your self-employment is 100% U.S., enter it here as a negative number to back it out.
Continue clicking through and accept the default in many screens after this one.
Foreign Taxes Paid
We don’t have any carryover from previous years in our example. A carryover is created when you paid more in foreign tax than the tax credit you’re allowed. Your leftover foreign tax paid is first carried back to the previous year and then carried over to the following year. If you have carryovers from previous years, they’ll show up here.
After going through all these, we’re getting 100% credit for the $700 foreign tax paid. Woo-hoo! You may get less than 100% credit depending on your income composition. If that’s the case, the credit you can’t take this year will carry over to next year.
Verify on Schedule 3
You can verify that you’re getting the foreign tax credit by clicking on Forms at the top right. Find Schedule 3 in the left navigation pane and look at the number on Line 1. You can also look at Form 1116. It looks awfully complicated.
Excess Foreign Tax CreditWe received 100% of the foreign taxes paid as a tax credit in our example. If you paid higher foreign taxes on a lower US income, you may not be able to take 100% of the credit. TurboTax will tell you that you’ll have to wait until next year to take a portion of the credit.
Carrying over part of the credit to the following year requires filing a Form 1116 Schedule B. TurboTax will automatically generate Schedule B when you need it.
SummaryTurboTax works when you paid more foreign taxes than the $300/$600 threshold that requires a Form 1116. You’ll have to gather the foreign income from the 1099 supplemental information from your brokers. After it’s all said and done, you’re getting a tax credit for taxes you paid to foreign countries through your mutual funds and/or ETFs.
Completing Form 1116 is complicated even with TurboTax. You’ll have a further complication in carryovers when you don’t get to use 100% of the credit. I try to avoid this situation by putting mutual funds and ETFs that invest in foreign countries in a tax-advantaged account. See Too Much Hassle in Claiming Foreign Tax Credit on IRS Form 1116.
Learn the Nuts and Bolts
I put everything I use to manage my money in a book. My Financial Toolbox guides you to a clear course of action.Read ReviewsThe post How to Enter 2023 Foreign Tax Credit Form 1116 in TurboTax appeared first on The Finance Buff.
How to Enter 2023 ESPP Sold in FreeTaxUSA: Adjust Cost Basis
[Updated on January 28, 2024 with screenshots from FreeTaxUSA for 2023 tax filing.]
If your employer offers an Employee Stock Purchase Program (ESPP), you should max it out. You come out ahead even if you sell the shares as soon as you can. See Employee Stock Purchase Plan (ESPP) Is A Fantastic Deal.
After you sell the shares from the ESPP, part of the income will be included on your W-2. However, the 1099-B form you receive from the broker still reflects your discounted purchase price. This post shows you how to make the necessary adjustment on your tax return using FreeTaxUSA.
Don’t pay tax twice!
If you use other tax software, please read:
How To Report ESPP Sales In TurboTaxHow to Report ESPP Sales in H&R Block SoftwareTable of ContentsWhen to Report1099-B From BrokerFreeTaxUSAAdjust Cost BasisVerify on Form 8949When to ReportBefore you begin, be sure to understand when you need to report. You report when you sell the shares you bought under your ESPP. If you only bought shares but you didn’t sell during the tax year, there’s nothing to report yet.
Wait until you sell, but write down the full per-share price (before the discount) when you bought. If you purchased multiple times, write down for each purchase:
The purchase dateThe closing price on the grant dateThe closing price on the purchase dateThe number of shares you boughtThis information is very important when you sell.
Let’s use this example:
You bought 1,000 shares under your ESPP on 9/30/20xx. The closing price on the purchase date was $12 per share. The closing price on the grant date six months before was $10 per share. You bought at $8.50 per share with the discount.
You would write down:
Grant Date4/1/20xxMarket Price on the Grant Date$10 per sharePurchase Date9/30/20xxMarket Price on the Purchase Date$12 per shareShares Purchased1,000Discounted Price$8.50 per shareKeep this information until you sell.
1099-B From BrokerWhen you sell, you will receive a 1099-B form from the broker in the following year. You will report your gain or loss using this 1099-B form and the information you accumulated for each purchase. Some brokers will supply supplemental information for your purchases.
Let’s continue our example:
You sold 1,000 shares from your purchase above on 10/5/20xx at $11.95 per share. After commission and fees, you netted $11,925. You received a 1099-B form from your broker showing a sales proceed of $11,925 in the following year. The 1099-B form shows the cost basis as $8,500, which reflects your discounted purchase price.
Because you didn’t hold it for two years after the grant date and one year after the purchase date, your sale was a “disqualifying disposition.” The discount is added as income to your W-2. This raises your cost basis. If you just accept the 1099-B as-is, you will be double-taxed!
FreeTaxUSANow let’s do it in FreeTaxUSA.
Find “Stocks or Investments Sold (1099-B)” in the “Common Income” section under “Income” in the menu. Click on “Add an Investment Sale.”
Choose “Stocks, Bonds, Mutual Funds” as the investment type.
Choose “One at a time.”
Enter the numbers on your 1099-B as they appear. The cost basis on your 1099-B was reported to the IRS but it was too low.
Don’t make any changes here. Your broker sent this information to the IRS. It has to match.
Adjust Cost Basis
You have this opportunity to make an adjustment. Check the “Yes” radio button and the box for “The basis shown in Box 1e is incorrect.”
Enter your purchase cost plus the amount added to your W-2. When you did a “disqualifying disposition” your cost basis was the full value of the shares on the date of the purchase. The market price was $12 per share when you purchased those 1,000 shares at $8.50 per share. Your employer added the $3,500 discount as income to your W-2. Therefore your true basis is $8,500 + $3,500 = $12,000.
If you didn’t sell all the shares purchased in that batch, multiply the number of shares you sold by the discount price on the date of purchase and add the discount included on your W-2. For example, if you sold only 500 shares and your employer added $1,750 to your W-2, your corrected cost basis is:
$8.50 * 500 + $1,750 = $6,000
If you had a wash sale, your 1099-B form would indicate it as such. We didn’t have a wash sale in our example.
We’re done with one ESPP sale. Repeat if you sold more than once during the year.
Verify on Form 8949We can verify that the adjustment makes it all the way to the tax form.
Click on the three dots on the top right above “Your Stocks or Investments Sold” and then click on “Preview Return.”
Scroll down to find Form 8949 in the popup. You see the negative adjustment in column (g).
If you didn’t make the adjustment and you just accepted the 1099-B as-is, you will pay capital gains tax again on the $3,500 discount you are already paying taxes through your W-2. Remember to make the adjustment!
Learn the Nuts and Bolts
I put everything I use to manage my money in a book. My Financial Toolbox guides you to a clear course of action.Read ReviewsThe post How to Enter 2023 ESPP Sold in FreeTaxUSA: Adjust Cost Basis appeared first on The Finance Buff.
How to Enter 2023 ESPP Sales in H&R Block: Adjust Cost Basis
[Updated on January 28, 2024 with screenshots from H&R Block tax software for 2023 tax filing.]
If your employer offers an Employee Stock Purchase Program (ESPP), you should max it out. You come out ahead even if you sell the shares as soon as you can. See Employee Stock Purchase Plan (ESPP) Is A Fantastic Deal.
After you sell the shares from the ESPP, part of the income will be included on your W-2. However, the tax form you receive from the broker still reflects your discounted purchase price. This post shows you how to make the necessary adjustment on your tax return using H&R Block tax software.
Don’t pay tax twice!
If you use other software, please read:
How to Report ESPP Sale in TurboTaxHow to Report ESPP Sale in FreeTaxUSATable of ContentsWhen to Report1099-B From BrokerUse H&R Block DownloadEnter 1099-B FormVerify on Form 8949When to ReportBefore you begin, be sure to understand when you need to report. You report when you sell the shares you bought under your ESPP. If you only bought shares but you didn’t sell during the tax year, there’s nothing to report yet.
Wait until you sell, but write down the full per-share price (before the discount) when you bought. If you purchased multiple times, write down for each purchase:
The purchase dateThe closing price on the grant dateThe closing price on the purchase dateThe number of shares you boughtThis information is very important when you sell.
Let’s use this example:
You bought 1,000 shares under your ESPP on 9/30/20xx. The closing price on the purchase date was $12 per share. The closing price on the grant date six months ago was $10 per share. You bought at $8.50 per share with the discount.
You would write down:
Grant Date4/1/20xxMarket Price on the Grant Date$10 per sharePurchase Date9/30/20xxMarket Price on the Purchase Date$12 per shareShares Purchased1,000Discounted Price$8.50 per shareKeep this information until you sell.
1099-B From BrokerWhen you sell, you will receive a 1099-B form from the broker in the following year. You will report your gain or loss using this 1099-B form and the information you accumulated for each purchase.
Let’s continue our example:
You sold 1,000 shares from your purchase above on 10/5/20xx at $11.95 per share. After commission and fees, you netted $11,925. You received a 1099-B form from your broker showing a sales proceed of $11,925 in the following year. The 1099-B form shows the cost basis as $8,500, which reflects your discounted purchase price.
Because you didn’t hold the shares for two years after the grant date and one year after the purchase date, your sale was a “disqualifying disposition.” The discount is added as income to your W-2. This raises your cost basis. If you just accept the 1099-B as-is, you will be double-taxed!
Now let’s account for it in the H&R Block software.
Use H&R Block DownloadThe screenshots below are from H&R Block Deluxe downloaded software. The downloaded software is both less expensive and more powerful than online software. If you haven’t paid for your H&R Block online filing yet, you can buy H&R Block download from Amazon, Walmart, and many other places. If you’re already too far along, make this year your last year of using the online service.
Enter 1099-B Form
Click on Federal -> Income. Scroll down to find the Investments section. Click on the “Go To” link next to “Sale of Stocks, Bonds, Mutual Funds, and Other Securities (1099-B).”
Import your 1099-B if you’d like. I’m adding it manually.
Give your account a description. Suppose this is from the ESPP account at E*Trade.
Now we add a sale.
We don’t want to add sales as a group because we need to make an adjustment.
Enter a description. Enter the dates and numbers from the 1099-B form as they appear. Make sure to match the type of gain or loss reported on your 1099-B form. It was short-term on my form.
The cost basis on your 1099-B was reported to the IRS but it was too low. Don’t change it here directly.
Scroll down and check the box for “The basis was reported to the IRS.” Enter your purchase cost plus the amount added to your W-2 as your correct basis amount.
When you did a “disqualifying disposition” your cost basis was the full value of the shares on the date of the purchase. The market price was $12 per share when you purchased those 1,000 shares at $8.50 per share. Your employer added the $3,500 discount as income to your W-2. Therefore your true basis is $8,500 + $3,500 = $12,000.
If you didn’t sell all the shares purchased in that batch, multiply the number of shares you sold by the discount price on the date of purchase and add the discount included on your W-2. For example, if you sold only 500 shares and your employer added $1,750 to your W-2, your corrected cost basis is:
$8.50 * 500 + $1,750 = $6,000
You are done with this entry. The summary gives the impression that you are paying tax again on a large gain, but don’t panic. We’ll verify it’s done correctly in the next section.
This shows a summary of the 1099-B form.
Verify on Form 8949
Click on the “Forms” button in the toolbar. Find Form 8949 and double-click on it.
Find your sale in either Part I or Part II depending on whether it was short-term or long-term on your 1099-B form.
You see the negative adjustment in column (g). If you didn’t make the adjustment and you just accepted the 1099-B as-is, you will pay capital gains tax again on the $3,500 discount you are already paying taxes through your W-2. Remember to make the adjustment!
Learn the Nuts and Bolts
I put everything I use to manage my money in a book. My Financial Toolbox guides you to a clear course of action.Read ReviewsThe post How to Enter 2023 ESPP Sales in H&R Block: Adjust Cost Basis appeared first on The Finance Buff.
How To Enter 2023 ESPP Sales In TurboTax: Adjust Cost Basis
[Updated on January 28, 2024 with screenshots from TurboTax for 2023 tax filing.]
If your employer offers an Employee Stock Purchase Program (ESPP), you should max it out. You come out ahead even if you sell the shares as soon as you can. See Employee Stock Purchase Plan (ESPP) Is a Fantastic Deal.
After you sell the shares from the ESPP, part of the income will be included on your W-2. However, the 1099-B form you receive from the broker still reflects your discounted purchase price. This post shows you how to make the necessary adjustment on your tax return using TurboTax.
Don’t pay tax twice!
If you use other tax software, please read:
How to Report ESPP Sales in H&R Block SoftwareHow to Report ESPP Sales in FreeTaxUSAIf you’re looking for a guide on doing taxes on RSU sales, please read Restricted Stock Units (RSU) and TurboTax: Net Issuance.
Table of ContentsWhen to Report1099-B From BrokerUse TurboTax DownloadEnter 1099-BCorrect Cost BasisVerify on Schedule DWhen to ReportBefore you begin, be sure to understand when you need to report. You report when you sell the shares you bought under your ESPP. If you only bought shares but you didn’t sell during the tax year, there’s nothing to report yet.
Wait until you sell, but write down the full per-share price (before the discount) when you bought. If you purchased multiple times, write down for each purchase:
The purchase dateThe closing price on the grant dateThe closing price on the purchase dateThe number of shares you boughtThis information is very important when you sell.
Let’s use this example:
You bought 1,000 shares under your ESPP on 9/30/20xx. The closing price on the purchase date was $12 per share. The closing price on the grant date six months before was $10 per share. You bought at $8.50 per share with the discount.
You would write down:
Grant Date4/1/20xxMarket Price on the Grant Date$10 per sharePurchase Date9/30/20xxMarket Price on the Purchase Date$12 per shareShares Purchased1,000Discounted Price$8.50 per shareKeep this information until you sell.
1099-B From BrokerWhen you sell, you will receive a 1099-B form from the broker in the following year. You will report your gain or loss using this 1099-B form and the information you accumulated for each purchase.
Let’s continue our example:
You sold 1,000 shares from your purchase above on 10/5/20xx at $11.95 per share. After commission and fees, you netted $11,925. You received a 1099-B form from your broker showing a sales proceed of $11,925 in the following year. The 1099-B form shows the cost basis as $8,500, which reflects your discounted purchase price.
Because you didn’t hold it for two years after the grant date and one year after the purchase date, your sale was a “disqualifying disposition.” The discount is added as income to your W-2. This raises your cost basis. If you just accept the 1099-B as-is, you will be double-taxed!
Now let’s account for it in TurboTax.
Use TurboTax DownloadThe screenshots below are from TurboTax Deluxe downloaded software. The downloaded software is way better than online software. If you haven’t paid for your TurboTax Online filing yet, you can buy TurboTax downloaded software from Amazon, Costco, Walmart, and many other places and switch from TurboTax Online to TurboTax download (see instructions for how to make the switch from TurboTax).
Enter 1099-B
Go to “Federal Taxes” -> “Wages & Income” -> “Investment Income” and find “Stocks, Cryptocurrency, Mutual Funds, Bonds, Other.”
Answer “Yes” because you sold stocks.
Choose “Stocks, Bonds, Mutual Funds” as the type of investments you sold.
Import your 1099-B if you’d like. I’ll skip import and continue manually.
Select or enter the financial institution. Suppose it’s E*Trade.
The sales included employee stock. Suppose we only had one sale.
TurboTax strongly suggests entering sales one by one. We’ll go with that suggestion.
Fill in the boxes from your 1099-B form. Look carefully at which category the sale belongs to on your 1099-B form (short-term or long-term, basis reported to the IRS or not). It was “short-term, basis reported to the IRS” on my form. It could be a different one on your form.
The cost basis on your 1099-B was reported to the IRS but it was too low. Don’t change it in Box 1e directly but check the box “The cost basis is incorrect or missing on my 1099-B.”
Correct Cost Basis
Enter your purchase cost plus the amount added to your W-2. When you did a “disqualifying disposition” your cost basis was the full value of the shares on the date of the purchase. The market price was $12 per share when you purchased those 1,000 shares at $8.50 per share. Your employer added the $3,500 discount as income to your W-2. Therefore your true basis is $8,500 + $3,500 = $12,000.
If you didn’t sell all the shares purchased in that batch, multiply the number of shares you sold by the discount price on the date of purchase and add the discount included on your W-2. For example, if you sold only 500 shares and your employer added $1,750 to your W-2, your corrected cost basis is:
$8.50 * 500 + $1,750 = $6,000
You get a summary of the sales you entered. Repeat if you have more sales to enter. We only had one sale in our example.
You get a summary of your net gain and loss. We have a net loss because we received less money after selling the shares and paying the commission and fees than our discounted purchase plus the income added to our W-2.
Verify on Schedule DWe can verify that the adjustment makes it all the way to the tax form. Click on “Forms” at the top right.
Find “Schedule D” in the left navigation pane.
Scroll up or down to find line 1b, 2, 3, 8b, 9, or 10 depending on the sale category on your 1099-B form.
You see the negative adjustment in column (g). If you didn’t make the adjustment and you just accepted the 1099-B as-is, you will pay capital gains tax again on the $3,500 discount you are already paying taxes through your W-2. Remember to make the adjustment!
Learn the Nuts and Bolts
I put everything I use to manage my money in a book. My Financial Toolbox guides you to a clear course of action.Read ReviewsThe post How To Enter 2023 ESPP Sales In TurboTax: Adjust Cost Basis appeared first on The Finance Buff.
How To Report 2023 Mega Backdoor Roth In H&R Block (Updated)
[Updated on January 16, 2024 with screenshots from H&R Block tax software for 2023 tax filing.]
A Mega Backdoor Roth is different from a regular Backdoor Roth. It’s done by making non-Roth after-tax contributions to a 401k-type plan and then moving it to the Roth account within the 401k-type plan or taking the money out (with earnings) to a Roth IRA.
It’s a great way to put additional money into a Roth account without having to pay much additional tax. Not all plans allow non-Roth after-tax contributions but some estimated that 40% of people can do it.
Suppose you did a Mega Backdoor Roth last year. You should have received a 1099-R form from your 401k plan provider. You’ll need to account for it on your tax return. Here’s how to do it in H&R Block tax software.
Table of ContentsUse H&R Block DownloadWithin the Plan Or To Roth IRA1099-R EntriesRollover DestinationVerify on Form 1040Use H&R Block DownloadThe screenshots in this post are from H&R Block Deluxe downloaded software. The downloaded software is both less expensive and more powerful than the online version. A user reported getting an error from the online version of H&R Block in comment #8. The H&R Block downloaded software doesn’t give that error.
If you haven’t paid for your H&R Block online filing yet, you can buy H&R Block downloaded software from Amazon, Walmart, Newegg, or Office Depot and switch to the downloaded software. If you’re already too far along with your entries, make this your last year of using the online version and switch to the downloaded version next year.
If you use other software, please read:
How to Report Mega Backdoor Roth in TurboTax How to Report Mega Backdoor Roth in FreeTaxUSAWithin the Plan Or To Roth IRAYou can do the mega backdoor Roth in two ways — convert within the plan or withdraw to a Roth IRA. Converting within the plan is much easier, and many plans automate the process. Transferring to a Roth IRA also works. See the previous post Mega Backdoor Roth: Convert Within Plan or Out to Roth IRA?
Here’s the scenario we’ll use as an example:
You contributed $10,000 as non-Roth after-tax contributions to your 401(k). By the time you converted the money to the Roth account within the plan or transferred it to your Roth IRA, your contributions earned $200. You converted $10,200 to your Roth account.
I’m using 401(k) as a shorthand. It works the same in a 403(b). Here are the entries into H&R Block software.
1099-R Entries
Go to Federal -> Income -> IRA and Pension Income (Form 1099-R). You can import the 1099-R or enter it manually. I’m showing manual entries.
Our 1099-R is a normal 1099-R. Enter the numbers from your 1099-R as-is. Ours looks like this:
The gross amount converted to the Roth account shows up in Box 1. The earnings are in Box 2a. If you didn’t have earnings in your rollover, Box 2a is zero. “Taxable Amount Not Determined” under Box 2b is left unchecked. The amount of your non-Roth after-tax contributions shows in Box 5. Box 7 has code G.
The IRA/SEP/SIMPLE box in Box 7 on your 1099-R should NOT be checked.
We’re not a retired public safety officer.
Rollover Destination
The Roth 401k account is officially a “designated Roth account” in the plan. Choose “Designated Roth account” if you converted within the plan. Choose “Roth IRA” if you took the money out of the plan to your Roth IRA.
That’s it. It’s as simple as that.
Verify on Form 1040Now we verify we’re taxed only on the $200 in earnings, and not on the $10,000 non-Roth after-tax contributions.
Click on “Forms” in the top menu bar. Double-click on “Form 1040 and Schedules 1-3” in the forms list.
Scroll down to find Line 5. The gross amount transferred to the Roth account shows on Line 5a. Line 5b shows you’re taxed only on the earnings. If you didn’t have earnings, Line 5b will be zero.
When you’re done looking at the form, close the forms window to get back to the interview.
Learn the Nuts and Bolts
I put everything I use to manage my money in a book. My Financial Toolbox guides you to a clear course of action.Read ReviewsThe post How To Report 2023 Mega Backdoor Roth In H&R Block (Updated) appeared first on The Finance Buff.
How to Report 2023 Backdoor Roth In FreeTaxUSA (Updated)
[Updated on January 28, 2024 with screenshots from FreeTaxUSA for 2023 tax filing.]
TurboTax and H&R Block are the two major tax software for filing personal tax returns. A low-cost alternative to TurboTax and H&R Block software is FreeTaxUSA. FreeTaxUSA isn’t only for simple returns. It can still handle more complex transactions, such as the Backdoor Roth.
Just as a refresher, a Backdoor Roth involves making a non-deductible contribution to a Traditional IRA followed by converting from the Traditional IRA to a Roth IRA. Both the contribution and the conversion need to be reported in the tax software. For more information on Backdoor Roth, please read Backdoor Roth: A Complete How-To.
Table of ContentsWhat To ReportConvert From Traditional IRA to RothTraditional IRA ContributionTaxable Income from Backdoor RothTroubleshootingWhat To ReportYou report on the tax return your contribution to a Traditional IRA *for* that year, and you report the conversion to Roth *during* that year.
For example, when you are doing your tax return for year X, you report the contribution you made *for* year X, whether you actually did it during year X or the following year between January 1 and April 15. You also report the conversion to Roth *during* year X, whether the contribution was made for year X, the year before, or any previous years. Therefore a contribution made during the following year for year X goes on the tax return for year X. A conversion done during year Y after you made a contribution for year X goes on the tax return for year Y.
You do yourself a big favor and avoid a lot of confusion by doing your contribution for the current year and finishing your conversion in the same year. I called this a “planned” Backdoor Roth — you’re doing it deliberately. Don’t wait until the following year to contribute for the previous year. Contribute for year X in year X and convert it during year X. Contribute for year Y in year Y and convert it during year Y. This way everything is clean and neat.
If you are already off by one year, catch up. Contribute for both the previous year and the current year, then convert the sum during the same year. See Make Backdoor Roth Easy On Your Tax Return.
Here’s the scenario we’ll use as an example:
You contributed $6,500 to a traditional IRA in 2023 for 2023. Your income is too high to claim a deduction for the contribution. By the time you converted it to Roth IRA, also in 2023, the value grew to $6,700. You have no other traditional, SEP, or SIMPLE IRA after you converted your traditional IRA to Roth. You did not roll over any pre-tax money from a retirement plan to a traditional IRA after you completed the conversion.
If your scenario is different, you will have to make some adjustments to the screens shown here.
Before we start, suppose this is what FreeTaxUSA shows:
We’ll compare the results after we enter the Backdoor Roth.
Convert From Traditional IRA to RothThe tax software works on income items first. Even though the conversion happened after the contribution, we enter the conversion first.
When you convert from a Traditional IRA to a Roth IRA, you will receive a 1099-R. Complete this section only if you converted *during* the year for which you are doing the tax return. If you only converted during the following year and you don’t have a 1099-R yet, skip to the next section: Traditional IRA Contribution. You’ll complete this section next year.
In our example, by the time you converted, the money in the Traditional IRA had grown from $6,500 to $6,700.
Click on “Add a 1099-R” when it asks you about the 1099-R.
It’s just a regular 1099-R.
Enter the 1099-R exactly as you have it. Pay attention to the code in Box 7 and the checkboxes. It’s normal to have the same amount as the taxable amount in Box 2a, when Box 2b is checked saying “taxable amount not determined.” Pay attention to the distribution code in Box 7. My 1099-R has code 2, and the IRA/SEP/SIMPLE box is also checked.
Right after you enter the 1099-R, you will see the refund number drop. Here we went from a $1,540 refund to $264. Don’t panic. It’s normal and temporary. The refund number will come up when we finish everything.
It’s not an inherited IRA.
It asks you about Roth conversion. Answer Yes to conversion and enter the converted amount. This whole 1099-R is the result of a Roth conversion.
You are done with this 1099-R. Repeat if you have another 1099-R. If you’re married and both of you did a Backdoor Roth, pay attention to whose 1099-R it is when you enter the second one. You’ll have problems if you assign both 1099-R’s to the same person when they belong to each spouse.
It asks you about the basis carried over from previous years. If you did a clean “planned” backdoor Roth every year, you can answer “No.” If you have gone back and forth before you found this guide, some of your previous answers may be stuck. Answering “Yes” here will give you a chance to review and correct them. If you have a number on line 14 of Form 8606 from your previous year’s tax return, answer Yes and enter it.
The values should be all 0 if you did a “clean” planned backdoor Roth.
We didn’t take any disaster distribution.
Now continue with all other income items until you are done with income. Your refund meter is still lower than it should be, but it will change soon.
Traditional IRA Contribution
Find the IRA Contributions section under the “Deductions / Credits” menu.
Answer Yes to the first question and enter your contribution. Leave the answer to “Did you recharacterize” at No. In our example, you contributed $6,500 directly to a Traditional IRA. If you originally contributed to a Roth IRA and then you recharacterized the contribution as traditional contributions, enter the amount in the Roth IRA box and choose Yes below when it asks you whether you recharacterized.
Your refund number goes up again! It was a refund of $1,540 before we started. It went down a lot and now it’s back to $1,496. The $44 difference is due to paying tax on the $200 earnings before we converted to Roth.
We didn’t contribute to a SEP, SIMPLE, or solo 401k plan in this example. Answer Yes if you did.
Withdraw means pulling money out of a Traditional IRA back to your checking account. Converting to Roth is not a withdrawal. Answer ‘No‘ here.
All values are zero when you did a “clean” planned Backdoor Roth.
It tells us we don’t get a deduction because our income was too high. We know. That’s why we did the Backdoor Roth.
If you only contributed *for* last year but you didn’t convert until the following year, remember to come back next year to finish the conversion part.
Taxable Income from Backdoor RothAfter going through all these, let’s confirm how you’re taxed on the Backdoor Roth. Click on the three dots on the top right above the IRA Deduction Summary and then click on “Preview Return.”
Look for Line 4 in Form 1040.
It shows $6,700 in IRA distributions in line 4a and only $200 is taxable in line 4b. If you are married filing jointly and both of you did a backdoor Roth, the numbers here will show double.
Tah-Dah! You put money into a Roth IRA through the backdoor when you aren’t eligible to contribute to it directly. You pay tax on a small amount of earnings if you waited between contributions and conversion. That’s negligible relative to the benefit of having tax-free growth on your contributions for many years.
TroubleshootingIf you followed the steps and you are not getting the expected results, here are a few things to check.
W-2 Box 13Make sure the “Retirement plan” box in Box 13 of the W-2 you entered into the software matches your actual W-2. If you are married and both of you have a W-2, make sure your entries for both W-2’s match the actual forms you received.
When you are not covered by a retirement plan at work, such as a 401k or 403b plan, your Traditional IRA contribution may be deductible, which also makes your Roth conversion taxable.
Self vs SpouseIf you are married, make sure you don’t have the 1099-R and the IRA contribution mixed up between yourself and your spouse. If you inadvertently assigned two 1099-Rs to one person instead of one for you and one for your spouse, the second 1099-R will not match up with a Traditional IRA contribution made by a spouse. If you entered a 1099-R for both yourself and your spouse but you only entered one Traditional IRA contribution, you will be taxed on one 1099-R.
Learn the Nuts and Bolts
I put everything I use to manage my money in a book. My Financial Toolbox guides you to a clear course of action.Read ReviewsThe post How to Report 2023 Backdoor Roth In FreeTaxUSA (Updated) appeared first on The Finance Buff.
How to Report 2023 Backdoor Roth in H&R Block Tax Software
Updated on January 28, 2024, with updated screenshots from H&R Block software for 2023 tax filing. If you use other tax software, see:
How To Report Backdoor Roth In TurboTaxHow to Report Backdoor Roth In FreeTaxUSAIf you did a Backdoor Roth, which involves making a non-deductible contribution to a Traditional IRA and then converting from the Traditional IRA to a Roth IRA, you need to report both the contribution and the conversion in the tax software. For more information on Backdoor Roth, please read Backdoor Roth: A Complete How-To and Make Backdoor Roth Easy On Your Tax Return.
Table of ContentsWhat To ReportUse H&R Block Download SoftwareConvert Traditional IRA to RothEnter 1099-RConverted to RothAdditional QuestionsNon-Deductible Contribution to Traditional IRAIRA ContributionConversion Isn’t RecharacterizationBasis From Previous YearPro-Rata RuleTaxable Income from Backdoor RothTroubleshootingFresh StartCovered by Retirement PlanSelf vs SpouseWhat To ReportYou report on the tax return your contribution to a traditional IRA *for* that year, and you report your conversion to Roth *during* that year.
For example, when you are doing your tax return for year X, you report the contribution you made *for* year X, whether you actually did it in year X or in the following year between January 1 and April 15. You also report your converting to Roth *during* year X, whether the money was contributed for year X, the year before, or any previous years.
Therefore a contribution made during the following year for year X goes on the tax return for year X. A conversion done during year Y after you made a contribution for year X goes on the tax return for year Y.
You do yourself a big favor and avoid a lot of confusion by doing your contribution for the current year and finishing your conversion during the same year. I called this a “planned” Backdoor Roth — you’re doing it deliberately.
Don’t wait until the following year to contribute for the previous year. Contribute for year X in year X and convert it during year X. Contribute for year Y in year Y and convert it during year Y. This way everything is clean and neat.
If you are already off by one year, catch up. Contribute for both the previous year and the current year, then convert the sum during the same year. See Make Backdoor Roth Easy On Your Tax Return.
Use H&R Block Download SoftwareThe screenshots below are taken from H&R Block Deluxe downloaded software. The downloaded software is way better than online software. If you haven’t paid for your H&R Block Online filing yet, consider buying H&R Block download software from Amazon, Walmart, Newegg, and many other places. If you’re already too far in entering your data into H&R Block Online, make this your last year of using H&R Block Online. Switch over to H&R Block download software next year.
Here’s the scenario we’ll use as an example:
You contributed $6,500 to a traditional IRA in 2023 for 2023. Your income is too high to claim a deduction for the contribution. By the time you converted it to Roth IRA, also in 2023, the value grew to $6,700. You have no other traditional, SEP, or SIMPLE IRA after you converted your traditional IRA to Roth. You did not roll over any pre-tax money from a retirement plan to a traditional IRA after you completed the conversion.
If your scenario is different, you’ll have to make some adjustments to the screens shown here.
Before we start, suppose this is what H&R Block software shows:
We will compare the results after we enter the Backdoor Roth.
Convert Traditional IRA to RothIncome comes before deductions on the tax form. Tax software is also organized this way. Even though you contributed before you converted, the software makes you enter the income first.
Enter 1099-RWhen you convert the Traditional IRA to Roth, you receive a 1099-R for that year. Complete this section only if you converted *during* the year for which you are doing the tax return. If you only contributed for the year in question but didn’t convert until the following year, skip all the way to the next section Non-Deductible Contribution to Traditional IRA.
In this example, we assume by the time you converted, the money in the Traditional IRA had grown from $6,500 to $6,700.
Click on Federal -> Income. Scroll down and find IRA and Pension Income (Form 1099-R). Click on “Go To.”
Click on Import 1099-R if you’d like. I show manual entries with “Enter Manually” here.
Just a regular 1099-R.
If you imported your 1099-R, double-check to make sure the import exactly matches the copy you received. If you enter your 1099-R manually, be sure to enter everything on the form exactly. Box 1 shows the amount converted to the Roth IRA. It’s normal to have the same amount as the taxable amount in Box 2a when Box 2b is checked saying “taxable amount not determined.” Pay attention to the distribution code in Box 7. My 1099-R has code 2.
My 1099-R had the IRA/SEP/SIMPLE box checked.
Did not inherit.
Converted to Roth
This is a very important question. Read carefully. Answer No, because you converted, not rolled over.
Now answer Yes, you converted.
We converted all of it in our example.
Answer Yes because you made a nondeductible contribution to a traditional IRA.
The refund in progress drops a lot at this point. We went from a $2,434 refund to $946. Don’t panic. It’s normal and only temporary. It will come back up after we complete the section for IRA contributions.
You are done with one 1099-R. Repeat the above if you have another 1099-R. If you’re married and both of you did a Backdoor Roth, pay attention to whose 1099-R it is when you enter the second one. You’ll have problems if you assign both 1099-R’s to the same person when they belong to each spouse. Click on Finished when you are done with all the 1099-Rs.
Additional Questions
A few more questions.
Answer Yes because you contributed to a Traditional IRA for the year.
We will wait.
Non-Deductible Contribution to Traditional IRANow we enter the non-deductible contribution to the Traditional IRA *for* the year in question. Complete this part whether you contributed in the same year or you did it or are planning to do it in the following year between January 1 and April 15.
If your contribution during the year in question was for the previous year, make sure you entered it on your previous tax return. If not, fix your previous return first.
IRA Contribution
Click on Federal -> Adjustments. Find IRA Contributions. Click on “Go To.”
Wrong tense but answer “Yes” because you contributed to an IRA for the year in question.
Check the box for Traditional IRA if you contributed directly to a Traditional IRA. If you originally contributed to a Roth IRA and then you recharacterized the contributions as traditional contributions, check the Roth IRA boxes here and then answer yes when it asks you whether you recharacterized.
You know you don’t get a deduction due to income. Enter anyway.
Enter your contribution amount. We contributed $6,500 in our example.
Conversion Isn’t Recharacterization
This is important. Answer No because you didn’t recharacterize. You converted to Roth.
We don’t have any excess contribution.
Basis From Previous Year
If you did a clean “planned” backdoor Roth and you started fresh each year, enter zero. If you contributed non-deductible for previous years (regardless of when), enter the number on line 14 of your Form 8606 from last year.
Pro-Rata Rule
This is another important question. If you are doing it the easy way as in our example, technically you can answer Yes and skip some questions. The safer bet is to answer No and go through the follow-up questions. If you’ve been going through these screens back and forth, you may have put in some incorrect answers in a previous round. You will have a chance to review and correct those answers only if you answer No.
In a clean planned backdoor Roth, you contribute for year X during year X. Leave the boxes blank. If you didn’t know better and you contributed for the previous year after January 1, enter the amount in the first box. If you already did it the hard way for the previous year, please, please, please do yourself a big favor and do it the easy way this year. See Make Backdoor Roth Easy On Your Tax Return.
The box should be blank when you do a clean planned backdoor Roth. If you have other Traditional, SEP, or SIMPLE IRAs, add up the balances from your year-end statements and put the value here. The software will apply the pro-rata rule.
That’s great. We’re expecting it.
A summary of your contributions. 0 in Traditional IRA deduction means it’s nondeductible. Click on Next. Repeat for your spouse if both of you did a Backdoor Roth.
We are done entering the non-deductible contribution to the Traditional IRA. Now the refund in progress should go back up. It was a refund of $2,434 when we first started. Now it’s a refund of $2,396. The difference of $38 is due to the tax on the extra $200 earned before the Roth conversion.
If you only contributed *for* last year but you didn’t convert until the following year, remember to come back next year to finish the conversion part.
Taxable Income from Backdoor RothAfter going through all these, let’s confirm how you’re taxed on the Backdoor Roth.
Click on Forms on the top and open Form 1040 and Schedules 1-3. Click on Hide Mini WS. Scroll down to lines 4a and 4b.
It shows $6,700 in IRA distributions, $201 of which is taxable. The taxable income came out to $201, not $200, due to some rounding in the calculation. If you are married filing jointly and both of you did a backdoor Roth, the numbers here will show double.
Tah-Dah! You put money into a Roth IRA through the backdoor when you aren’t eligible to contribute to it directly. You will pay tax on a small amount in earnings if you waited between contributions and conversion. That’s negligible relative to the benefit of having tax-free growth on your contributions for many years.
TroubleshootingIf you followed the steps and you are not getting the expected results, here are a few things to check.
Fresh StartIt’s best to follow the steps fresh in one pass. If you already went back and forth with different answers before you found this guide, some of your previous answers may be stuck somewhere you no longer see. You can delete them and start over.
Click on Forms and delete IRA Contributions Worksheet, 1099-R Worksheet, and Form 8606. Then start over by following the steps here.
Covered by Retirement PlanMake sure the “Retirement plan” box in Box 13 of the W-2 you entered into the software matches your actual W-2. If you are married and both of you have a W-2, make sure your entries for both W-2’s match the actual forms you received.
When you are not covered by a retirement plan at work, such as a 401k or 403b plan, your Traditional IRA contribution may be deductible, which also makes your Roth conversion taxable.
Self vs SpouseIf you are married, make sure you don’t have the 1099-R and the IRA contribution mixed up between yourself and your spouse. If you inadvertently assigned two 1099-Rs to one person instead of one for you and one for your spouse, the second 1099-R will not match up with a Traditional IRA contribution made by a spouse. If you entered a 1099-R for both yourself and your spouse but you only entered one Traditional IRA contribution, you will be taxed on one 1099-R.
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