I made a $1000 traditional IRA contribution for 2005 but did not take a deduction, do I pay taxes for 2006?

Question

I took the $1,000 out last december and I received a 1099-R, How do I include it on my 1040-2006 without paying taxes on it? The IRS knows I did not include it on 1040-2005 line 32 but they received this 1099-R as well.

I used the money to buy a mobile home that I now live in. Can I use that?

It does show $1,000 in box 2a. I did know about form 8606. I needed the money in a hurry and could care about the consequences. It is adding $400 to my tax bill. Amended 2005-1040 it is

Answer 1

If in 2005 you contributed $1,000 but did not show this on your tax return, you'll need to file an amended 2005 return so that you can get the tax deduction for it.

In 2006 you'll have to show the $1,000 as a distribution and may even have to pay penalties (10% Federal) in addition to the tax if this was an early distribution and you don't qualify for any exceptions (ie. used it for a first home purchase etc.).

Answer 2

Did you intentionally treat the 2005 IRA contribution as a non-deductible contribution? Is that why your return showed no deduction, or was it a mistake on your part by not showing the deduction? If it was intended to be non-deductible contribution, you should have also completed Form 8606 to show your basis in the IRA.

Did the 2006 Form 1099-R show the amount as both a gross distribution in Box 1 and a taxable distribution in Box 2? If "zero" is shown in Box 2, then you're OK for the 2006 return. Just report it as a gross distribution that is not taxable--most software programs can handle this. If it was shown as taxable in Box 2, you may want to consider amending your 2005 return by including Form 8606, if it wasn't originally included. Then report the distribution for 2006 as not taxable.

This, then, would be a return of capital from your IRA (as long as the amount contributed and the amount distributed (withdrawn) are the same. You may still be subject to the 10% penalty for early withdrawal, even if you can substantiate the 2005 contribution as a non-deductible contribution.

Answer 3

You pay taxes on the withdrawal - and if you're under age 59-1/2, you'll pay an additional 10% penalty on the amount withdrawn.

You can amend your 2005 return and take the IRA deduction if you were eligible to take it. If you were not eligible to deduct it, but put the money in as a non-deductible contribution, there is additional paperwork you should have filed - if that's the case, I'd see a CPA to help you straighten this all out.