Case Study 4: Excess Contributions
Maria, age 35, made an excess contribution of $1,000, which she withdrew by the due date of her return. At the same time, she also withdrew the $50 income that was earned on the $1,000. She must include the $50 in her gross income (for the year in which the excess contribution was made). She must also pay an additional tax of $5 (the 10% additional tax on early distributions because she is not yet 59½ years old), but she does not have to report the excess contribution as income or pay the 6% excise tax. Maria receives a Form 1099-R showing that the earnings are taxable for the current year.
Taxpayers must include the interest or other income that was earned on the excess contribution in gross income. Taxpayers must report it on their return the year the excess contribution was made. The withdrawal of interest or other income may be subject to an additional 10 percent tax on early distributions. Taxpayers will receive Form 1099-R indicating the amount of the withdrawal. If the excess contribution was made in a previous tax year, the form will indicate the year in which the earnings are taxable.