July 7, 2015 in Taxes

Dear Tax Talk,

I have made nondeductible IRA contributions for a long time and have maintained the records of taxes filed. All the 1040 and 8606 forms are with me. Now I have started the required minimum distributions. How am I supposed to deduct the nondeductible contributions from the RMD? Is there any specific form for this?

— Ram

Dear Ram,

Yes, there is a specific form for this calculation, and you are already familiar with it because it is your old friend Form 8606, Nondeductible IRAs. You should be commended for keeping copies of all the prior-year Form 1040s and Form 8606s, as that is a little-known requirement for your calculation. The importance of tracking your nondeductible IRA contributions over the years means that you will not be paying tax on the required minimum distributions made to you that are attributable to your nondeductible IRA contributions.

Rules for making deductible contributions

If you (or your spouse) are covered by a retirement plan at work, your IRA contribution can be deducted from income as long as your modified adjusted gross income is:

  • Less than $61,000 for a single filer (or head of household).
  • Less than $98,000 for a married couple filing jointly (or qualifying widow or widower).
  • Less than $10,000 for a married individual filing a separate return.

Source: IRS

More specifically, you will be completing Part I of Form 8606, and you will see as you go through the steps that your records will make this job much easier for you. Every year you made a nondeductible contribution, you calculated your “basis” and it was shown on Part I, line 14. Your basis is the amount of contributions made to your IRA that you have already paid taxes on in prior years.

You will need to look at line 14 on the last Form 8606 that you filed. The information on that line represents “your total basis in traditional IRAs for 2014 and earlier years.” Then, enter that amount on line 2 of your current year Form 8606. Finally, you will see that for the current year, by the time you get down to line 14, this is where you get the deduction you are seeking.

Thanks for the great question and all the best to you.

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