TAX AND PENALTY ON EXCESS CONTRIBUTIONS WITHDRAWN

[Guest fiy99]

I made excess Roth-IRA contributions for 1998, 1999 & 2000 because I don't have "compensation" in these years. Here is how I did:

For 1998 tax year-I contributed $2000 in 2/99.

For 1999 tax year-I contributed $2000 in 2/99.

For 2000 tax year-I contributed $2000 in 2/00.

In 2/00, I found the mistake and withdraw all excess contribution plus income earned on the excess contributions. I reporated Form 5329 to 1998 and 1999 to pay 6% excise tax for 1998's excess. I also reported $322.00 interest income in 1999 tax returns for the earnings on the exess. In 2001, I received a Form 1099-R indicated that Total distributions are $7942 and taxable amounts are $6016. Is this correct? I thought I only need to report 10%penalty and as taxable income on 1998's $2000 plus $1942 earnings (total around $3942)? Should I deducted the $322.00 earnings that I have already included in 1999 income tax return? Please help!

[Appleby]

The custodian may have made mistake .A return of excess contribution , after the dealine for filing your tax return for the year for which the excess contribution was made, is not taxable or subjected to the 10% penalty if the excess amount is $2,000 or under. Lets look at how each excess should be processed

1-- 1998 excess amount should have been returned to you and reported as non-taxable, i.e. it should be in box 1 of your 1099-R but not box 2. Had it been more than $2,000, it would be reported as taxable. No earnings should be removed with this excess as it was removed after your tax filing deadline for 1998

2-- 1999 excess amount should have been returned to you and should also be reported as non-taxable. However, the earnings on this, the 1999 excess amount , should be reported in box 1 and box 2. This means that the earnings would be taxable. The code in box 7 should be 'P' to show that you should add the earnings to your previous year's tax return, i.e. 1999 . ( previous year because you made the correction in year 2000 and will receive the 1099-R for year 2000. The IRS nees to know that the earnings is not year 2000 income)

3-- The excess amount for year 2000 should be reported as nontaxable as well. The earnings should be reported as taxable. However, the code in box 7 should be '8' to should that the earnings are taxable in 2000.

So far, you box 1 ( reportable amount) totals should be a total of the following:

1. 2000 ( for 1998 excess contribution)

2. 2000 ( for 1999 excess contribution)

3. $___ ( the amount determined to be the attributable income on year 1999 excess contribution)

4. 2000 ( for the 2000 excess contribution)

5. $___ ( the amount determined to be the attributable income on year 2000 excess contribution)

This is $6,000 excess contributions plus earnings for the two years, 1999 and 2000.

In box 2, which reports the taxable amount, you should have a total of only the atributable income on the excess for 1999 and 2000.

If you are under age 59 1/2, then you will pay 10% pre-mature penalty only on the amounts in box 2- for year 1999 and 2000.

If you already reported the income for 1999 on your 1999 tax return, then you should not add it to your 2000 tax return.

You should be receiving three 1099-Rs

Your custodian may have made a mistake and reported the excess amounts as taxable. You need to bring this to their attention immediately.