Form 8606 Line 14 negative basis — but Alan says that never happens

Submitted by ssel on Sat, 2019-01-19 21:54

I did a backdoor Roth last year, starting and ending the year with zero in my tIRA. I made a $6500 nondeductible tIRA contribution, and converted $6501 (there was a tiny bit of interest). Now I’m filling out Form 8606.

The nontaxable portion of the conversion is computed by multiplying 6501 by the fraction 6500/6501. If I compute this fraction to 4 decimal places that would leave me with $1 taxable (and zero basis). But having to track that $1 for the next five years is a drag, and the form’s instructions give me a way out. I’m allowed to round the fraction to 3 decimal places, which makes it 1.000. Then the nontaxable portion is 6501, leaving zero taxable.

The basis on Line 14 is computed by subtracting the nontaxable portion from the contribution amount: 6500 – 6501 = -1. There’s nothing that says “or zero if negative” to account for this rounding error.

So should I submit the form with -1 on Line 14, and then presumably enter this on Line 2 next year?

Thanks.



Submitted by Alan - IRA critic on Sun, 2019-01-20 00:46

  • Basis can never be negative, but if you are completing a paper 8606, I would round to just 3 places since that will leave you with a non taxable conversion and no basis carryover on line 14.  If you are using a tax program, I wouldn’t bother trying to override it even if it produces taxable income of $1 since this not likely to change you actual tax. Technically, this is a matter of rounding AND decimal places and in completing tax forms the rounding is not supposed to take place until the figure is placed on Form 1040. But here again, many taxpayers round every figure they are working with and tax programs are also not consistent about rounding. The IRS does not seem to care  (even when they are not in a govt shutdown :))
  • Again, there should never be a negative figure on line 14 or on lines 1 or 2 of Form 8606, although sometimes you will have basis left over on line 14 even when the TIRA has been totally distributed.  For example, if you contribute 6500 and it loses 100 before you convert it and there is no other TIRA activity or balance, you will have 100 on line 14 to carry to line 2 on your next 8606. 

Submitted by ssel on Sun, 2019-01-20 02:03

And let’s assume that Lines 3 and 9 are exact values.  The only rounding is Line 10, where the directions explicitly say how to round.  Then Line 13 is also an exact value.

Submitted by ssel on Sun, 2019-01-20 02:10

Thanks, Alan.  So since I have this:

  •         Line 3:   6500  (contribution)
  •         Line 9:   6501  (conversion)
  •         Line 10:  1.000
  •         Line 13:  6501 (nontaxable part of conversion)

on Line 14 (“subtract line 13 from line 3”) would you recommend that I write 0, even though the directions if taken literally would have me write -1? 

Submitted by Alan - IRA critic on Sun, 2019-01-20 02:36

  • I would treat the line 14 instructions as including “if the result is 0 or less, enter 0”, like the line 6 instructions do.
  • Re lines 3 and 9, I think you mean non rounded values including cents. The IRS probably should have specified the number of decimal points for line 10, not left it open to use 3 or more than 3. I recall I tried to enter 4 in some tax program once and it would not accept more than 3. 
  • I rechecked the Form 1040 Inst rounding rules. They are optional, but do indicate that if rounding is done it should apply to all schedules (aka forms) as well as the 1040. So either round everywhere using the .50 and up rule or do not round anything. However, some tax programs will not accept anything but whole dollars.

Submitted by David Mertz on Sun, 2019-01-20 03:07

Sounds like improper rounding to the nearest dollar on dollar amounts.  With line 10 carried to 4 decimal places and rounding dollar amounts to the nearest dollar, the proper amounts on Form 8606 are:

  • Line 3 = $6,500
  • Line 5 = $6,500
  • Line 8 = $6,501
  • Line 9 = $6,501
  • Line 10 = 0.9998  (line 5 divided by line 9, carried to 4 decimal places)
  • Line 11 = $6,500 (0.9998 * $6,501 = $6499.68 which rounds to $6,500)
  • Line 13 = $6,500
  • Line 14 = $0

 

Submitted by ssel on Sun, 2019-01-20 04:39

Alan,                Thanks again.  I’ll write 0 on line 14.              By “assume… exact values,” I meant that my contribution was exactly 6500.00, and my conversion exactly 6501.00.  No rounding involved.  (This was a hypothetical, to remove the issue of rounding error on those numbers from the discussion.)   

Submitted by ssel on Sun, 2019-01-20 04:43

DMx, your example holds if line 10 is rounded to 4 decimal places.  But my question was about what happens when line 10 is instead rounded to 3 decimal places, which is explicitly allowed.  Thanks.

Submitted by David Mertz on Sun, 2019-01-20 15:31

  • I was originally confused by your statement, “But having to track that $1 for the next five years is a drag, and the form’s instructions give me a way out.”  Because most people are concerned about tracking basis, I originally thought you were concerned about tracking some residual basis.  I now see that you are referring to tracking the 5-year holding period for the taxable portion of the conversion.  If you take a distribution of money attributable to this conversion within 5 years and before age 59½, I see that you would need to include the $1 on line 1 of the Form 5329, even though (assuming no other amounts subject to early-distribution penalty) the resulting penalty on line 4 would be $0.
  • I guess that, for simplicity, the instructions for Form 8606 do not say that the amount on lines 11, 12 and 13 should be limited to the amount on line 5.  That limitation would be just as reasonable as not allowing an amount on line 14 of less than zero, which is also not stated.

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