Generally, Code 2 is reflected on the Form 1099-R Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. received from the payer of the distribution for a Roth IRA conversion, where a Traditional IRA is converted to a Roth IRA.

Per IRS Publication 590-A Contributions to Individual Retirement Arrangements (IRAs), on page 28:

Income. You must include in your gross income distributions from a traditional IRA that you would have had to include in income if you hadn’t converted them into a Roth IRA. These amounts are normally included in income on your return for the year that you converted them from a traditional IRA to a Roth IRA.

You don’t include in gross income any part of a distribution from a traditional IRA that is a return of your basis, as discussed under Are Distributions Taxable in Pub. 590-B.

The Form 1099-R distribution data must be entered in TaxAct for Form 8606 Nondeductible IRAs to calculate.

To report Form 1099-R and enter info for when a Traditional IRA is converted to a Roth IRA (if you need help accessing Form 1099-R, go out our Form 1099-R - Entering Distributions from Retirement Plans FAQ):

1. From within your Form 1099-R, continue with the interview process until you reach the screen titled Retirement Plan Income - Roth Conversion (if you don't enter the information correctly, you won't see this screen).
2. Click the data entry field below Roth IRA conversion amount, and type the amount.

The converted amount will be reflected on Form 8606, Line 16 and the taxable amount will appear on Form 8606, Line 18 which will then be transferred to Form 1040 U.S. Individual Income Tax Return, Line 4b.

If you have a basis in the converted amount, the taxable amount may be reduced. You will want to check Prior year nondeductible traditional IRA contribution(s) on the screen titled Retirement Plan Income - Nondeductible IRA Contributions when going through the Form 1099-R section of the Q&A. Then, when you get to the Form 8606 section of the Q&A (right after the Form 1099-R section), you will enter your basis in ALL traditional IRAs on the screen titled Nondeductible IRAs - Basis in Traditional IRAs. Finally, on the screen titled Nondeductible IRAs - Basis in Roth Conversions, you will need to review and/or modify the Basis you had in the amount that was converted. Based on these entries, the TaxAct program will calculate the appropriate taxable amount to transfer to Form 1040.

Note that any link in the information above is updated each year automatically and will take you to the most recent version of the webpage or document at the time it is accessed.