Backdoor Roth increasing tax liability by $2300?! Please, help

[Civex]

So, as the post title says, when I enter my wife's 1099-R from Vanguard into TurboTax, our tax liability increases by $2300. I believe this has to do with the original traditional IRA account amounts being deposited in previous tax years, but I'm not sure. Summary of what was done:

5500-regular Roth in 2014 (below income limits)
5500-backdoor Roth in 2015
----somewhere in 2016 an error was made (either I clicked a wrong button or I incorrectly explained how to complete a Roth conversion and some/all? of the balance was recharacterized to tIRA.)
3000-tIRA in 2016
In 2017 I saw that her Vanguard account had ~$11000 in her tIRA and we converted the whole amount to a Roth.

All of the money at Vanguard was contributed *after* tax, but when I enter the 1099-R for 2017 (amount of roughly ~11000) our tax liability changes by $2300. I'm kind of at a loss on how to fix this; I'd prefer not to use a CPA if possible. This is the first year we are filing jointly, our first year married, so I haven't always done her taxes, but I have tried to help with investments. Any help is greatly appreciated!

[secondcor521]

If you convert money from a traditional IRA to a Roth IRA, the converted amount is treated as income unless you have a basis in the traditional IRA.  It appears TurboTax thinks that you converted $11,000 from a traditional IRA to a Roth IRA because you did.  It appears TurboTax thinks you have no basis in the traditional IRA because you haven't properly told it about your basis.

"Basis" in a traditional IRA is simply the sum of your nondeductible contributions to the traditional IRA.  (If you have a mix of deductible and nondeductible contributions, then you take the ratio or percentage.)

Basis is reported to the IRS on Form 8606, lines 1 and 2.

If you did not deduct the contributions to your traditional IRA from your (or your new wife's) taxes, then those count as nondeductible contributions and increase your basis and should have been reported to the IRS on Form 8606 in the years that the contributions were made.

If you didn't deduct the contributions and didn't file a Form 8606, I believe you can go back and file the Form 8606(s) independently with the IRS without amending your taxes.  Use the correct Form 8606(s) for the correct years (i.e., file a separate one for 2014, 2015, and 2016 as needed).

Eventually what you will find is that the basis will carry over from year to year on Form 8606 and you will end up being able to subtract your basis from your conversion amount and the entire conversion should be almost tax free.  I say almost because if the amount converted is more than the amount contributed, the excess will be taxed as income and if you are under 59 1/2 you will also pay a 10% penalty on the excess conversion.  So if you (or your wife) contributed a total of $11,000 and you converted $12,000, then you would pay taxes plus 10% on the excess $1,000.  If the value of the account value went down and the amount converted was less than your total contributions, then you would not owe taxes or penalties.  (And to answer the next question, no, I don't believe there is any deduction for the loss.)

Form 8606 and the instructions are very confusing in my opinion, but if you read them carefully you can probably do it.

Good luck!

[MDM]

Form 8606 and the instructions are very confusing in my opinion, but if you read them carefully you can probably do it.

+1 to that and all the rest.

OP, see also Backdoor Roth IRA - Bogleheads and links therein.