What it is?
Form 8606 is a tax form that must be filed if nondeductible contributions were made to an individual retirement account (IRA) during the tax year. It is also necessary if you have received Roth IRA dividends, certain other IRA payments, or converted certain accounts to a Roth IRA during the year.
Why you need to file?
Taxpayers need to file form 8606 in the following cases
- When you are making Nondeductible IRA contribution
- When your IRA consists of both deductible and nondeductible contribution. It helps to track basis in IRA.
- To Identify basis reduces tax when you take IRS distribution.
- To calculate taxable and nontaxable portion of distribution.
In the following circumstances, taxpayers must submit Form 8606.
- When contributing to a Nondeductible IRA
- When your IRA includes both tax-deductible and nontax-deductible contributions. It aids in IRA base tracking.
- Identifying basis decreases tax liability when receiving an IRS dividend.
- Determine the taxable and nontaxable portion of the distribution.
How and Where to File it?
Form 8606 can be e-filed or paper-filed with the rest of your annual tax return when you e-file Form 1040 and any other tax forms, as well as any tax payments. Form 8606 can be filed alone; see form 8606 for details and mailing address.
What are the consequences of non-compliance?
If Form 8606 was not filed to indicate nondeductible contributions, it is considered that the contributions were deductible.
The IRA will have no tax basis and a $50 penalty will be assessed if the taxpayer fails to complete Form 8606 to disclose a nondeductible contribution and does not provide an acceptable explanation.
What is the best practice?
File Form 8606 annually. If you forgot to file Form 8606, you must revise your tax return to include Form 8606.
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