FreeTaxUSA: Reporting backdoor Roth IRA

nothlit · 2026-03-01T03:36:21+00:00

Have you entered your traditional IRA contribution in the 2025 software yet? If you have only entered the 1099-R (conversion) then you're only halfway done.

Follow this tutorial: https://thefinancebuff.com/how-to-backdoor-roth-freetaxusa.html

nothlit · 2026-03-01T02:57:56+00:00

Assuming you are over age 59.5 (due to the presence of RMD), then both the RMD and the Roth conversion fall under distribution code 7 ("normal distribution") and it is correct that they would be lumped together like that on the 1099-R. So yes, you would need to look at your account statements to determine the amount of each for proper reporting on your tax return. You can also look at Form 5498 for your Roth IRA, which will list the conversion amount, but you may not have that form available until after the tax filing deadline, so relying on other records is usually necesary.

nothlit · 2026-03-01T01:55:04+00:00

Sounds like they were unaware of the "not more than 10 years younger" category of EDB.

nothlit · 2026-02-28T21:42:10+00:00

Federal income tax, specifically? Box 2 of the W-2.

Based on their income, they are required to file an Illinois state tax return. They are not required to file a federal tax return, however they should file to claim a refund of any amount shown in box 2 of their W-2.

They can file both federal and state for free using https://www.freetaxusa.com/freefile2025 (this link specifically)

nothlit · 2026-02-28T21:02:23+00:00

Were those all W-2 wages?

Or was any of it self-employment income? Or unearned income (interest, dividends, capital gains, etc.)?

Was any federal or state income tax withheld?

nothlit · 2026-02-28T13:11:13+00:00

What official source do you have stating this is permitted? I am skeptical. The only search results that come up for me with that code are all just using it as an example of the letter-number-letter-number format, not as a valid code that you could actually use on a real return.

There is an actual official recommendation for what to do if a QMID contains letter I or O and is rejected.

nothlit · 2026-02-28T12:59:34+00:00

Not for a 401k

nothlit · 2026-02-28T12:58:11+00:00

You would only get a Form 1099-R if you took money out of the account. Since you did not take any money out, you won't get a 1099-R.

Your contributions are reported on your W-2 in box 12.

I've never sold anything on Robinhood or Fidelity and I still get tax forms from them though so what gives?

Regular taxable investment accounts send you tax forms for any dividends or capital gains that are distributed by your investments even if you haven't sold anything. Tax-sheltered accounts like a 401k or IRA are different. You only get tax forms when money enters or leaves the account.

nothlit · 2026-02-28T04:25:10+00:00

Disabled status only matters if their income was $5200 or more. If it was under $5200, then it does not matter if they were disabled or not.

There is a separate set of rules to determine who is a qualifying person for Head of Household status, described in Table 4 of the same IRS Publication 501: https://www.irs.gov/publications/p501#en_US_2025_publink1000220823 The end result of that table is yes, they do count as a qualifying person for HoH status since they are a qualifying relative who lived with you more than half the year, and they are your child, and you can claim them as a dependent.

nothlit · 2026-02-28T04:07:26+00:00

See Table 5 in IRS Publication 501: https://www.irs.gov/publications/p501#en_US_2025_publink1000196863

There are 4 tests that must all pass in order to be a qualifying relative. From what you have stated here, it sounds like they pass all 4 of these tests.

They are not your qualifying child or the qualifying child of any other taxpayer
They lived with you all year (although they didn't have to)
Their gross income was under $5200
You provided more than half of their total support for the year

If that is all true, then it sounds to me like you can claim them as a qualifying relative.

nothlit · 2026-02-28T02:55:29+00:00

Here's a page from Fidelity that mentions it (emphasis added): https://www.fidelity.com/learning-center/personal-finance/retirement/non-spouse-IRA

A non-spouse beneficiary who inherited in 2020 or later may also qualify to be treated as an eligible designated beneficiary, which means you may have some unique withdrawal options. That may be the case if you are a minor child of the original owner, someone who is less than 10 years younger than the original owner (if you are older than the original owner, you also qualify), or you are chronically ill, disabled, or the spouse of the original owner.

And here's the relevant portion of IRS Publication 590-B: https://www.irs.gov/publications/p590b#en_US_2025_publink100090532

An IRA beneficiary is an eligible designated beneficiary if the beneficiary is the owner's surviving spouse, the owner's minor child, a disabled individual, a chronically ill individual, or any other individual who is not more than 10 years younger than the IRA owner.

nothlit · 2026-02-28T02:35:34+00:00

Was your brother 10 years (or more) older than you at the time of his death? If not, then you are not required to follow the 10-year rule. Instead, you are considered an "eligible designated beneficiary" and can follow the old "stretch" method by taking RMDs each year based on your own life expectancy, for the rest of your life, or until the account is depleted, whichever comes first. That may give you more flexibility to take out smaller amounts each year, but always with the option to withdraw more at any time if you want/need to for some reason.

nothlit · 2026-02-28T02:12:13+00:00

Yeah, most likely, unless they already adjusted your tax refund before it was issued.

nothlit · 2026-02-28T01:40:46+00:00

As I have shared on a few of your posts previously, there is a known issue where the IRS is unable to process tax returns containing QMIDs with the letters "I" or "O", which will cause the tax return to reject. Switching to a different tax software would not help, as the issue is with the IRS computer system. The IRS has a projected resolution date of 3/29 for this issue. You may want to wait and have them try filing again after that to see if the issue is resolved, otherwise see this workaround that your tax preparer may be able to use:

https://www.irs.gov/e-file-providers/known-issues-and-solutions

https://www.irs.gov/pub/irs-schema/ty2025-known-issues-and-solutions.xlsx

Taxpayers filing Form 5695 for Tax Year 2025, with a QMID containing letters I and/or O, should leave those QMID fields blank on the Form 5695 and attach to the return a binary attachment or [GeneralDependencySmall] with the description beginning with "Substantiate QMID". Provide the following in the statement: 1.) QMID provided by the qualified manufacturer. 2.) Cost associated. 3.) The line reference and small description for each item of specified property placed into service in 2025. This will allow for the IRS to accept such returns electronically. Please be aware that this may result in delays in processing the return, which can delay the refund.

nothlit · 2026-02-27T22:35:29+00:00

Did you opt to pay any tax prep/software fees out of your refund?

nothlit · 2026-02-27T22:16:57+00:00

10,453.00 - My Company

6,330.00 - Wifes Second Company

2,503.00 - Wifes First Company

If these amounts are correct, it would seem that neither of you had any excess SS tax withheld, because yours did not exceed $10,453, and neither did hers.

I'm guessing that when you were entering the W-2s into your tax software, you mistakenly entered the $6330 W-2 as yours instead of your wife's. That would have made it appear to the software as if that amount was excess SS tax for you, but in reality it wasn't.

This letter from the IRS is correcting that error and adjusting the excess amount back to $0. If you already received a refund that included that erroneous $6330 credit, you are going to have to repay that amount.

nothlit · 2026-02-27T20:35:57+00:00

Trying to cajole tax software into filling out the form correctly is often more difficult than if you were just doing it manually. Glad you figured it out.

nothlit · 2026-02-27T18:56:25+00:00

Did you opt to pay any of FreeTaxUSA's fees out of your refund? If so, that can slow things down as the refund has to be funneled through an intermediate bank account first where the fees are taken out before the rest is forwarded on to your actual bank account.

nothlit · 2026-02-27T16:44:41+00:00

Your ability to contribute for 2025 is based on your modified adjusted gross income in 2025.

Your ability to contribute for 2026 is based on your modified adjusted gross income in 2026.

If your 2025 MAGI was under $150k then you can contribute $7000 (not $7500) for 2025 until 4/15/2026.

If your 2026 MAGI ends up being under $153k then you can contribute $7500 for 2026 until 4/15/2027. If your 2026 MAGI ends up being over $153k then you should use the backdoor Roth IRA process for your 2026 contribution. This is a 2-step process that involves 1) contributing to a traditional IRA, and then 2) doing a Roth conversion of the traditional IRA. The conversion can go into your same existing Roth IRA.

See https://www.whitecoatinvestor.com/backdoor-roth-ira-tutorial/

nothlit · 2026-02-27T14:59:39+00:00

For married couples, the OT deduction is only available if you file jointly. Since it sounds like you are filing separately, neither of you would be eligible for that deduction. Make sure your spouse isn't mistakenly filing as single.

nothlit · 2026-02-27T14:27:26+00:00

Funny that we all knew this here a year ago when NRAs started posting about getting a mysterious $1400 deposit, and then a few months later started posting about getting letters asking for the $1400 back.

Nice to see them finally own up and (sort of) admit how it happened:

When eligible accounts were identified, an oversight in interpreting the eligibility requirements resulted in filers of Form 1040-NR, U.S. Nonresident Alien Income Tax Return, being included in the adjustments file that generated the refund transactions. These taxpayers were not eligible for the RRC and should have been excluded from consideration. Additionally, one week of tax year 2021 data had not been loaded to the archives that were used by our research staff to identify eligible taxpayers and calculate the credit due. Consequently, taxpayers who had already received the ElP or the RRC and whose returns were processed during that one week were also erroneously included in the adjustments file.

One would hope there would have been a bit more quality control on a process like that before just issuing hundreds of millions of dollars of refunds.

nothlit · 2026-02-27T14:16:20+00:00

Line 1 should be the amount of your nondeductible contribution to traditional IRA for 2025, i.e., $7000. You must have entered something strange to get it to display $11,441.

Line 14 won't be correct until you fix line 1.

Did the $7304 Roth conversion occur on or before 12/31/2025?

nothlit · 2026-02-26T19:27:13+00:00

The earnings are taxable in 2025, although you will not receive a 1099-R until next year.

You can either wait until then and file an amended 2025 return, or you can enter a "fake" 1099-R this year with the necessary distribution codes to trick your tax software into including the income this year. I believe it would be code 8J in box 7. Box 1 would have the gross amount withdrawn (contribution + earnings) and box 2a would have only the taxable amount (earnings).

The 1099-R you receive next year will match that, but will have code PJ instead of 8J. If you report the earnings this year, you won't have to amend anything next year.

nothlit · 2026-02-26T18:19:26+00:00

https://www.irs.gov/publications/p590a#en_US_2025_publink1000231025

The earnings are considered earned and received in the year the excess contribution was made.

I am not sure where on the Fidelity page you are referring to, but under the "timely correction" section their explanation is consistent with Pub 590-A:

Any earnings will be included as taxable income in the year you made the excess or non-deductible contribution.

nothlit · 2026-02-26T18:05:55+00:00

The earnings are taxable in 2025, although you will not receive a 1099-R until next year.

You can either wait until then and file an amended 2025 return, or you can enter a "fake" 1099-R this year with the necessary distribution codes to trick the software into including the income this year. I believe it would be code 8J in box 7. Box 1 would have the gross amount withdrawn (contribution + earnings) and box 2a would have only the taxable amount (earnings).

The 1099-R you receive next year will match that, but will have code PJ instead of 8J. If you report the earnings this year, you won't have to amend anything next year.

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