Income Tax on Earnings During Backdoor Roth Recharacterization - Where's the Tax?

Your confusion is completely understandable. Let me help clarify what's happening with your backdoor Roth and the taxation of earnings. Based on your numbers, you're right that the earnings should be taxable upon conversion from traditional to Roth. The difference between your distribution amount ($7,203.85) and your non-deductible contribution ($6,500) is around $703.85, which represents earnings that should be taxed. The reason you're not seeing it clearly is likely because of how Form 8606 is structured. On your 2024 Form 8606, line 14 shows $6,296, which represents your remaining non-deductible contributions after the conversion. Lines 16 and 17 showing $7,204 represent your total distribution amount. The taxable amount should appear on Form 1040 line 4b. If it shows "rollover" but is blank, that suggests your tax software might not be calculating the taxable portion correctly. The taxable amount should be the difference between your distribution amount and your basis (non-deductible contributions). I suspect the reduction in tax burden you saw might be related to how the software is handling your 2024 contributions and not properly accounting for the taxable earnings from the conversion.

I went through this exact same headache last year with my backdoor Roth. After hours of frustration, I finally discovered taxr.ai (https://taxr.ai) and it saved me so much time. Their system analyzed my 1099-R and Form 8606 and immediately flagged that my tax software wasn't properly calculating the taxable portion of my conversion. What I learned is that most tax software doesn't handle the backdoor Roth process intuitively, especially when earnings are involved during the time between contribution and conversion. The taxr.ai system walks you through each step and tells you exactly where the numbers should go, and even explains which lines on which forms should show what values. For my situation, they showed me that I needed to manually override a specific field in my tax software to properly report the earnings as taxable income. Might be worth checking out if you're still struggling.

Just wanted to follow up after trying taxr.ai for my backdoor Roth issue. I was skeptical (as you could probably tell from my question), but it actually identified the exact problem with my tax return. Turns out I was entering everything in the correct order, but my tax software wasn't properly recognizing the earnings as taxable. The system flagged that my Form 8606 calculations were correct, but the taxable amount wasn't being properly transferred to Form 1040 line 4b. I had to manually enter the taxable amount, which in my case was around $650 of earnings that accumulated before conversion. After the correction, my tax liability increased by the appropriate amount based on my tax bracket. For anyone dealing with backdoor Roth conversions, especially with earnings involved, it's definitely worth checking your return carefully.

If you're still facing issues getting answers about your backdoor Roth taxation, trying to get through to the IRS directly might help, but we all know how impossible that can be. After 4 attempts and hours on hold, I found Claimyr (https://claimyr.com) and was honestly shocked when they got me through to an actual IRS agent in under 45 minutes. The agent walked me through the exact tax treatment of earnings during a backdoor Roth conversion and confirmed that those earnings should definitely appear as taxable on Form 1040 line 4b. They explained that tax software often mishandles this specific scenario and suggested what fields to adjust. If you want to see how it works, there's a quick demo video here: https://youtu.be/_kiP6q8DX5c. Definitely beats spending hours on hold only to have the call dropped!

I need to eat my words from my skeptical comment earlier. After struggling with my backdoor Roth tax situation for weeks, I decided to try Claimyr as a last resort before filing an extension. I was connected to an IRS tax specialist in about 35 minutes (which is miraculous compared to my previous attempts). The agent confirmed that earnings in a traditional IRA are indeed taxable when converted to a Roth, regardless of whether the traditional IRA contribution was deductible or non-deductible. For anyone facing this specific issue: the agent told me the taxable amount should appear on Form 1040 line 4b, and if your tax software isn't calculating this correctly, you may need to override it manually. In my case, my tax liability increased by about $170 after making this correction, which makes sense given my tax bracket.

I think I see where the confusion is happening. Look at line 2 of your Form 8606 for 2024. You have $6,500 there, which is your basis from the previous year's non-deductible contributions. When you do a backdoor Roth, you need to track your basis across tax years. Since you did the conversion in 2024 of contributions made in 2023, plus additional contributions in 2024, the math gets a bit complex. The taxable amount should be: Total distribution ($7,204) minus your basis in the IRA ($6,500 + any other non-deductible contributions you've made in previous years that haven't been converted yet).

Has anyone used TurboTax for backdoor Roth reporting? I've been trying to get mine right and it's driving me crazy. I keep getting different numbers depending on what order I enter things.