(IRS) Form 8606 is not required when the taxpayer

What is Form 8606?

The Form 8606 is entitled “Non-Deductible IRAs”. This is a document distributed by the Internal Revenue Service, which has to be completed and submitted by the taxpayers, who make non-deductible contributions to their Individual Retirement Account. This account is a part of a retirement plan, it allows the taxpayers to save money for their retirement. It constitutes a supplement for the Social Security and any other forms of retirement savings. Once the taxpayer becomes retired, the money is withdrawn from their Individual Retirement Account for their benefit. The contributions made to the Individual Retirement Account are tax deductible, but the withdrawals are taxed in the same way as the income. There are some situations, when the taxpayers cannot make deductible contributions to IRA, for instance when they take part in the retirement plan introduced their employer or the modified adjusted gross income of their household exceeds a certain limit determined for a given tax year.

Where to file Form 8606?

The taxpayers have to complete this form every year they have made any non-deductible contributions and enclose it to their Form 1040, 1040NR or 1040A, which has to be filed to the Internal Revenue Service Center. If the taxpayer is not obliged to submit any other documents except for the Form 8606, they should file it to the IRS center, to which they would file their tax return, if they were required to do this.

IRS Form 8606 penalties

The taxpayer, who should submit the form 8606 to the Internal Revenue Service, but failed to do so, will have to pay a penalty in the amount of $500,00. If the taxpayer overrates the amounts of non-deductible contributions they made to their Individual Retirement Account, they can be subject to the penalty in the amount of $100. However, the taxpayer may be exempt from paying the fine, if they can show a reasonable cause for the failure to file the form or for overrating the amounts they entered into the form.

Form 8606 instructions 2017/2018

The Form 8606 consists of three parts. Before we start to complete them we have to give some personal information about ourselves. First, we have to provide our first and last name and our social security number. The married couples may file a joint return, but they have to fill out and enclose a separate form 8606 for each of spouses.

In Part I of the Form 8606, the Internal Revenue Service needs the information about non-deductible contributions to traditional Individual Retirement Accounts from Traditional, SEP and SIMPLE IRAs. However, only some taxpayers have to complete this part. It applies to all those individuals, who made non-deductible contributions to their traditional Individual Retirement Accounts for the year the tax return is submitted or withdrew funds from traditional, SEP or SIMPLE IRA and made non-deductible contributions to the traditional IRA in the year the return is submitted for or during an earlier year, or they have converted some fraction of their traditional, SEP and SIMPLE IRAs to Roth IRAs in the year the return is filed for and made non-deductible contributions to traditional IRA in this year or during an earlier year.

Here, we should explain different abbreviations for retirement plans used in the form, since in the United States there are a few types of retirement accounts.

The Traditional IRA is the most basic type of the retirement account. It has been introduced in the United States pursuant to the Employee Retirement Income Security Act, which was entered into force in 1974. The IRA is kept by a financial institution, such as a brokerage or bank, and some part of the funds deposited on the account may be invested by this institution. The only requirement the taxpayer has to meet in order to be able to make contributions to the traditional IRA is earning sufficient income. There are certain limits in the amounts we can contribute to the IRA during the year. For instance, the limits in 2017-2018 are $5,500 for the taxpayers, who have not turned fifty, and $6,500 for those at the age of fifty or older.

SEP IRA is a Simplified Employee Pension Individual Retirement Arrangement, which allows a small company or a self-employed person to make retirement plan contributions into a Traditional IRA, set up in the employee’s name.

SIMPLE IRA, which is a Savings Incentive Match Plan for Employees, is a tax-deferred employer’s retirement plan, which enables the employees to save and invest the money deposited on it.

Roth IRA, which is an individual retirement account is tax-free, subject to certain requirements. The withdrawals from the Roth IRAs are not taxed, which is the main difference between this retirement plan and the remaining ones, which offer only the reduction in the amount of tax.

During their working life, the taxpayers are allowed to change one type of their Individual Retirement Account to another type. This activity is called the conversion or recharacterization. If the taxpayer makes a conversion, it means they transfer the funds from one trustee to another one, which is in the same financial institution. Such transfers are usually tax-free, but they have to be reported with the use of the Form 8606. However, there are some situations when the taxpayers cannot convert to  Roth IRA. First of all, the participant of the retirement plan cannot be filing the form separately from their spouse and the Modified Adjusted Gross Income cannot be more than $100,000.

The MAGI is calculated in order to verify, what kind of tax deduction the individual may receive. In order to determine the person’s MAGI, we have to add for instance foreign income, foreign-housing deductions, student-loan deductions or IRA-contribution deductions to their adjusted gross income. The higher the MAGI, the lower deductions the individual can have on their IRA contributions.

Interestingly, we can take the funds from our Individual Retirement Account. We cannot borrow them, since it may disqualify our plan and result in the obligation to pay tax on our assets, but it is allowed to make a rollover. A rollover means taking the funds from our account for the maximum of sixty days. If the money is returned to the account within the sixty-day limit, it can still maintain its status as tax deferred funds. However, we may only make a sixty-day rollover once in twelve months.

Another way to move the assets deposited at IRA is to make the transfer. This is made by the institution that receives the funds, it sends the request to the disbursing institution asking for the transfer and waits for the check payable to another institution. Such transfers can be made to and from Traditional Individual Retirement Accounts or from employment plans. As opposed to rollover, it is not required to report this type of activity to the Internal Revenue Service.

Form 8606 Part I

In the beginning of Part I of the Form 8606, we have to provide the amount of non-deductible contributions we made to our Traditional IRA during the tax year for which we file the form, but also the ones made between January and April 17 next year, if they were made for the tax year in question. Then we must give the total basis in the traditional IRAs in line two, and provide the contributions, which were made from the first of January to April 17 of the year following the year for which the tax return is submitted. Next, we are required to provide the amount of all our traditional, SIMPLE and SEP IRAs at the end of the tax year, and the outstanding rollovers; and then our distributions from the same accounts for the tax year, but in this case we have to exclude the rollovers.  The Internal Revenue Service also needs the information about the net amounts we have converted from traditional, SEP and SIMPLE IRAs to Roth IRAs.

Form 8606 Part II

The Part II of the Form 8606 refers to the Conversions from Traditional, SEP or SIMPLE IRAs to Roth IRAS, and has to be completed by any taxpayer, who has made such a conversion in the year for which the tax return is filed for. In the case the taxpayer has filled in Part I of the form, in line sixteen they only have to copy the amount from line eight of the form, since the value was already given. If not, they have to enter the net amount converted to Roth IRAs from other tax-advantaged retirement plans and its basis in line seventeen. In the line eighteen, the taxpayer has to provide the taxable amount, by subtracting line seventeen from sixteen.

Form 8606 Part III

The part III of the Form 8606 is associated with the distributions from Roth IRAs. This part should be completed only by these filers, who have actually made such distributions during the tax year. In line nineteen, we have to provide the total nonqualified distributions from Roth IRAs. However, we need to exclude the rollovers, recharacterizations, distributions, which constitute a return of contributions or were made when the taxpayer was at the age of fifty nine and half or older, one-time distributions to the Health Savings Account, qualified charitable distributions or those made upon death or because of disability or due to divorce. In line twenty, we should provide the qualified first-time homebuyer expenses, but the value cannot exceed $10,000. The line twenty two refers to the basis in the contributions to the Roth IRA and line 24 to the basis in conversions from traditional, SEP or SIMPLE IRAs, as well as the rollovers from qualified retirement plans to Roth IRA. In line 25 c we have to calculate the taxable amount, which has to be also provided on our tax return and Forms 1040, 1040NR or 1040A.

If the taxpayer files only this form, and it is not attached to their tax return, they have to sign the form 8606. If any other person or company has prepared the information that has to be included on the form, the taxpayer has to enter their name, the name of their company and address. Such a preparer has to sign the document and give the Employer Identification Number, as well as the telephone number.

Form 8606 Example:

Form 8606 example

Form 8606 is not required when the taxpayer



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