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Penalty for overstatement. If you overstate the amount of nondeductible contributions on your Form 8606 for any tax year, you must pay a penalty of $100 for each over- statement, unless it was due to reasonable cause. Penalty for failure to file Form 8606. You will have to pay a $50 penalty if you don’t file a required Form 8606, unless you can prove that the failure was due to reasona- ble cause. Tax on earnings on nondeductible contributions. As long as contributions are within the contribution limits, none of the earnings or gains on contributions (deductible or nondeductible) will be taxed until they are distributed. Cost basis. You will have a cost basis in your traditional IRA if you made any nondeductible contributions. Your cost basis is the sum of the nondeductible contributions to your IRA minus any withdrawals or distributions of nonde- ductible contributions. Commonly, distributions from your traditional IRAs will include both taxable and nontaxable (cost basis) amounts. See Pub. 590-B for more information on distributions for more information. Recordkeeping. There is a recordkeeping work- sheet, Appendix A. Summary Record of Tradi- tional IRA(s) for 2018, that you can use to keep a record of deductible and nondeductible IRA contributions. Examples—Worksheet for Reduced IRA Deduction for 2018 The following examples illustrate the use of Worksheet 1-2. Example 1. For 2018, Tom and Betty file a joint return on Form 1040. They are both 39 years old. They are both employed. Tom is covered by his employer's retirement plan. However, Betty isn’t covered by her employer's re- tirement plan. Tom's salary is $62,000, and Betty's is $33,500. They each have a traditional IRA and their com- bined modified AGI, which includes $9,000 interest and dividend income, is $104,500. Because their modified AGI is between $101,000 and $121,000 and Tom is covered by an employer plan, Tom is subject to the deduction pha- seout discussed earlier under Limit if Covered by Em- ployer Plan. CAUTION ! RECORDS For 2018, Tom contributed $5,500 to his IRA, and Betty contributed $5,500 to hers. Even though they file a joint return, they must figure their IRA deduction separately. Tom can take a deduction of only $4,538. Using Work- sheet 1-2, Figuring Your Reduced IRA Deduction for 2018, Tom figures his deductible and nondeductible amounts as shown on Worksheet 1-2. Figuring Your Re- duced IRA Deduction for 2018—Example 1 Illustrated. He can choose to treat the $4,538 as either deductible or nondeductible contributions. He can either leave the $962 ($5,500 − $4,538) of nondeductible contributions in his IRA or withdraw them by April 15, 2019. He decides to treat the $4,538 as deductible contributions and leave the $962 of nondeductible contributions in his IRA. Betty figures her IRA deduction as follows. Betty can treat all or part of her $5,500 contribution as either deduc- tible or nondeductible. This is because she isn’t covered by her employer's retirement plan, and their combined modified AGI isn’t between $189,000 and $199,000. Therefore, she isn’t subject to the deduction phaseout dis- cussed earlier under Limit if Covered by Employer Plan, and she doesn’t need to use Worksheet 1-2. Betty de- cides to treat her $5,500 IRA contributions as deductible. The IRA deductions of $4,538 and $5,500 on the joint return for Tom and Betty total $10,038. Example 2. For 2018, Ed and Sue file a joint return on Form 1040. They are both 39 years old. Ed is covered by his employer's retirement plan. Ed's salary is $45,000. Sue had no compensation for the year and didn’t contrib- ute to an IRA. Sue isn’t covered by an employer plan. Ed contributed $5,500 to his traditional IRA and $5,500 to a traditional IRA for Sue (a Kay Bailey Hutchison Spousal IRA). Their combined modified AGI, which includes $2,000 interest and dividend income and a large capital gain from the sale of stock, is $188,555. Because the combined modified AGI is $121,000 or more and Ed is covered by his employer's plan, he can’t deduct any of the contribution to his traditional IRA. He can either leave the $5,500 of nondeductible contributions in his IRA or withdraw them by April 15, 2019. Sue figures her IRA deduction as shown on Worksheet 1-2. Figuring Your Reduced IRA Deduction for 2018—Ex- ample 2 Illustrated. Page 16 Chapter 1 Traditional IRAs