Everyone wants to make sure that they have a comfortable retirement. And for this every individual needs to make some nondeductible contributions. These contributions should be made to an Individual Retirement Account (IRA). And you also need to report all such contributions to the IRS. The question comes how to report these contributions. You will have to fill out the IRS Form 8606 for this. Now you must have started having questions like:
- What is IRS form 8606?
- How to fill out IRS form 8606?
- What is IRS form 8606 used for?
- What are some important IRS form 8606 instructions?
There is no need to worry as here we are going to answer all such questions.
What is IRS Form 8606?
If you are a U.S. taxpayer who has made some nondeductible contributions to an IRA then you will have to fill out the IRS Form 8606. It is required to report these contributions to the IRS. for every tax year you have made such contributions in, you have to fill out a separate form.
Generally all the contributions that you make to an Individual Retirement Account are deductible from ordinary income. But there can be a few specific circumstances in which the case is different. If you are someone who has participated in an employer retirement plan and your households exceed a threshold of modified adjusted gross income then you will not be able to make these deductible contributions. But you can still make some contributions to an Individual Retirement Account.
You May Also Read About: IRS Form 8821?
Who Can File?
You need to fill out the IRS Form 8606 along with the standard income tax forms, if you are filing individually. These standard income tax forms are IRS Form 1040 or 1040NR. If you are a taxpayer with a cost basis above zero for IRA assets then you should use Form 8606 to prorate the taxable vs. nontaxable distribution amounts.
If you fail to fill out the IRS form 8606 in a distribution year then the chances are that your income taxes and some possible penalties are due. What would ordinarily be tax-free money is now taxable.
How to File?
If you are not able to find the Form 8606 on the IRS website then you can also get it from any office supply stores, libraries, post offices etc. there are some other businesses as well that provide free tax forms. If you are taking the help of a tax expert for your tax preparation and filing then you can also ask him/her.
To fill out Form 8606, you’ll need to gather your information about and nondeductible contributions you made during the tax year, along with the total basis you’ve built up in previous years (Line 14 from your most recent Form 8606).2 If you have made any previous nondeductible contributions, you’ll also need to document any distributions you’ve withdrawn from traditional, SEP, or SIMPLE IRAs (Part II) as well as any distributions from Roth IRAs (Part III).
You also have the option to e-file Form 8606 along with your annual tax return. And if you do the filing by mail then you have to send Form 8606 along with Form 1040, your tax payment, and any other relevant tax forms to the IRS processing office for your state. Make sure that you do it before the given deadline. If you fail to do so you will have to pay some penalty charges.
If a taxpayer fails to fill out the IRS Form 8606 to report a non-deductible commitment will owe the IRS a $50 punishment. Moreover, if the non-deductible commitment sum is exaggerated on the structure, a punishment of $100 will apply. In the two cases, the punishment might be deferred if the citizen can show sensible reason for not consenting to the prerequisites. The IRS regularly considers “sensible reason” for circumstances, for example, passing, genuine disease, debilitation, powerlessness to get records, cataclysmic events, or other extraordinary conditions. It is constantly viewed as on an individual premise dependent on the particular realities of the circumstance.
Re-characterizing an Individual Retirement Account:
If you are a younger citizen then you should consider re-characterizing traditional and Simplified Employee Pension (SEP) IRA assets as Roth assets. By doing this you make the assets immediately taxable as ordinary income. And the money you have placed into a traditional or SEP IRA has usually never been taxed. When this amount comes out of a traditional or SEP IRA, it becomes taxable. But you will not have to pay any taxes on the amount that has been already taxed, even after it comes out of the account.
With re-characterization of an IRA, you will not have to pay taxes on future distributions. And the immediate tax bill will be there. No matter what, always consider taking help from a tax expert before doing this.
Things to Keep in Mind:
- Filers who make nondeductible commitments to an IRA use IRS Form 8606.
- Any citizen with a cost premise over zero for IRA resources should utilize Form 8606 to customize the available versus nontaxable dispersion sums.
- Record Form 8606 with Form 1040 or 1040NR by the due date, including due dates for expansions.
- On the off chance that citizens don’t document Form 8606 of every tax year, the person in question may have to settle annual assessments.
You May Also Read About: IRS Form 1095-C?
By now you must have understood that the IRS Form 8606 is an important tax document. And you must file it with your annual income tax return. If you are someone who makes some non-deductible contributions to an IRA then you have to be well aware what records to keep from year to year as well as when and how to complete the form.
Now you must have got an idea what is the process to fill out the IRS Form 8606 and also how difficult it is. So it is important for you to understand when you have to fill out the IRS form 8606. If you have decided to manage everything on your own then it is more important. In that case, keeping up with all the deadlines can become a little but difficult for you. This is why most of the people are thinking about hiring a tax professional these days. Having someone to take care of everything related to your taxation is really a great thing.
At this point you must be thinking how to start. You can give us a call on +1-866-301-2307 If you have any questions related to this.