By Beverly DeVeny, IRA Technical Expert
Follow Me on Twitter: @BevIRAEdSlott
The 2012 tax law changes, passed by Congress after the fact in 2013, have necessitated some changes in forms used to file your 2012 taxes. IRS has just updated Form 8606, Nondeductible IRAs. This latest version is dated January 15, 2013. This form is required to be filed by anyone who contributes or rolls over after-tax amounts to an IRA during the year. Once you have after-tax amounts in any IRA, you must file the form in any year that you take a distribution from any of your IRAs. Your distributions will be treated as pro-rata distributions, partly taxable and partly non-taxable. For this purpose, all of your IRAs are treated as one IRA, including your SEP and SIMPLE IRAs.
The instructions for the form start out with a “What’s New” section. This section reminds you that the Roth IRA contribution limits increased for 2012. We knew this before 2012 started. IRS generally announces inflation adjusted amounts in November for the upcoming year.
The next item in “What’s New” is on qualified charitable distributions (QCDs). This information is new as of the passage of the American Taxpayer Relief Act of 2012, which was signed into law on January 2, 2013. QCDs were retroactively reinstated for 2012 with two special rules allowing certain transactions in January 2013 to be counted as QCDs for 2012. The instructions reference IRS Pub. 590 for more information.
The last item in “What’s New” is on bankrupt airline payments. The FAA Modernization and Reform Act, effective February 14, 2012, allowed payments contributed to Roth IRA account to be recharacterized to IRA accounts and allowed new payments to be contributed to IRA accounts.
These last two items are included in the instructions for Form 8606 in case you have any after-tax amounts in any of your IRAs. After-tax amounts in your IRA cannot be used for QCD transactions (this is an exception to the pro-rata treatment of IRA distributions). If you had after-tax amounts in your bankrupt airline payment that is now being recharacterized to an IRA, you will need to file Form 8606 to tell IRS that you have after-tax funds in your IRA.
Page 6 of the instructions contains some critical information. There is a penalty of $50 for not filing the form, “unless you can show reasonable cause.” There is also a section titled, “What Records Must I Keep?” The first paragraph of this section says that you must keep copies of your records “until all distributions are made” (emphasis added). What IRS is saying here is that if it questions your claim that you have after-tax funds in your IRA, you better be able to prove it.
• IRS Form 8606, Nondeductible IRAs, has just been updated for 2012 tax returns
• The instructions for the form include information on the special rules for QCD
• The instructions for the form include information on the new rules for bankrupt airline payout
• Documentation of your after-tax funds in your IRAs must be kept until “all distributions are made”