Header Section

Smart money/Coming Soon

Reminder From IRS: Don't Forget Your 2010 Roth Conversion!

IRS recently issued a "friendly" reminder to taxpayers who did Roth conversions back in 2010 and took advantage of the two-year deal to split their conversion income equally between 2011 and 2012.

IRS wants to be sure that those taxpayers do not "forget" to include the second half of their conversion on their 2012 tax returns.

ed slott roth conversion tax 2-year dealNormally, a conversion is taxable in the year the funds left the IRA or employer plan (you do not have until April 15th to do a conversion for the prior year like you do for a Roth contribution). In 2010, Congress needed to raise money so it encouraged us to do Roth conversions by allowing us to not include the income on our 2010 tax returns, but to instead include half of the converted amount on our 2011 return and the other half on our 2012 return. Now, it is time to pay the piper.

Don’t think that IRS has forgotten about your tax bill. In 2010, they made you tell them how much you needed to include on your 2012 return. It was done on IRS Form 8606 in Part II for an IRA conversion and Part III for a conversion from a plan. Since the ability to defer the income for two years was only available in 2010, you will only find that specific language on the 2010 version of Form 8606.

If you do not have the funds to pay the tax, you do not have too many options. It is too late to recharacterize the Roth conversion and get out from under the tax bill. A 2010 Roth conversion could be recharacterized up to October 15, 2011. IRS has the ability to allow a taxpayer additional time to do a recharacterization, but generally will only do so if the failure to do a recharacterization is due to advisor error. The extension of time can only be granted through a private letter ruling request and IRS charges a fee of $4,000 for those requests. You will have to pay professional fees for someone to prepare that ruling too. There is no guarantee that a taxpayer’s request will be granted.

So, make sure you include the last installment of income from those 2010 Roth conversions on your 2012 tax return. If you cannot pay the tax bill, seek the advice of a tax professional for your options on dealing with IRS.

Article Highlights:

  • The last installment of income from a 2010 Roth conversion is due with 2012 income tax returns
  • There is no ability to recharacterize a 2010 Roth conversion

- By Beverly DeVeny and Jared Trexler

0 comments:

Post a Comment

Mailbag

Thursday's Slott Report Mailbag

Consumers: Send in Your Questions to [email protected]

Q:
You recently said that a 401(k) distribution would add to your MAGI (modified adjusted gross income) for the purpose of determining if you are subject to the 3.8% healthcare surtax. What about Roth IRA distributions? Would they also count towards your total MAGI income for surtax purposes?

Thanks

A:
IRA distributions are exempt from the 3.8% surtax, but taxable distributions from IRAs can push income over the threshold amount, causing other investment income to be subject to the surtax. Because Roth IRA distributions are generally tax-free, they don’t count towards your total MAGI.