This is a follow-up question to I may have made an ineligible contribution to a Roth IRA. What should I do?

In 2017, prior to Tax Day, I made a TY 2016 contribution to my IRA that exceeded my 2016 income. I also made a TY 2017 contribution to my IRA that exceeded my 2017 income. I am in the process of recharacterizing my contributions with my IRA custodian which makes me liable for the following taxes:

  • Capital gains on earnings taken out of IRA
  • 6% penalty tax on excess TY 2016 contribution

I am uncertain about the following:

  • Can I pay all these taxes on my TY 2017 taxes or will I have to amend my TY 2016 taxes as well?
  • Can I apply my standard deduction against the capital gains taxes and/or the 6% penalty tax?
  • 1
    The standard deduction reduces the income that is subject to tax, not the tax itself directly, whether capital gains tax or 6% penalty tax. Feb 21 '18 at 21:48
  • Ah, good catch. I see how that works for capital gains, but how does it work for the penalty tax? Feb 21 '18 at 21:58
  • 1
    The income tax due is computed on Schedule D and the Qualified Dividends and Capital Gain Tax Worksheet (the latter is not attached to the tax return), and is entered on Line 44 of Form 1040. The penalty is recorded on Line 59, I believe, and adds to the total tax due which you write on Line 63. This is how much you owe the IRS, and the next few lines are devoted to what you have already prepaid (usually via withholding) and what credits you are being given (e.g. Earned Income Credit) Feb 21 '18 at 22:08
  • Okay, given what you said, my understanding is that exemptions/deductions cannot eliminate the penalty tax. Only credits can eliminate the penalty tax. Is that correct? Feb 21 '18 at 22:34

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