Roth Conversion Strategy in 2009
Hello:
I am trying to help a family member get an optimum conversion tax rate for 2009. The nice thing is that he has plenty of rollover money and will have [u]no income [/u]in 2009. Is my math correct that he can convert about 16K at the 10% tax rate:
Assumptions:
Single with standard deduction.
buffer of 1k in interest/dividends.
$16,000 conversion +$1,000 interest/dividends – $3650 (personal exemption) – $5700 (standard deduction)=
[b]$7650 taxable income [/b]($8350 is the 2009 threshold for the 10% rate).
Is it that simple or am I missing something?
Thanks,
pmk
Permalink Submitted by Alan Spross on Thu, 2009-09-03 03:13
You have addressed all the components, except that he could add another $700 to fill out the 10% bracket. Perhaps the 16,000 was chosen to leave some margin for error or unexpected income. His tax bill as stated would be $765 plus possibly any state income tax. The effective federal tax rate for the 16,000 conversion is only 4.8%!
If there is any prior basis in his TIRA, less than the full conversion will be taxable, allowing him to gross up the conversion.
Probably unlikely with the numbers posted, but his standard deduction could also be increased by new car sales taxes or up to $500 for real estate taxes paid. If he has any capital losses, it would also increase the conversion amount capacity.
Make sure he specifies NO withholding for the TIRA conversion distribution.
Permalink Submitted by Anonymous (not verified) on Thu, 2009-09-03 04:06
alan:
Thanks for bringing up some excellent points on my trivial question. The 16K was just choosen as a round number and to capture any unexpected issues. I am not sure I understand the real estate taxes point. With only real estate taxes (no mortgage) he does not have enough expenses for itemizing anyway. I was not aware you could deduct more, over the standard deduction?
I like your point about the effective tax rate being so low. This is a great opportunity for him and in 2010 he can continue spreading subsequent amounts over 2011 and 2012.
pmk
Permalink Submitted by Alan Spross on Thu, 2009-09-03 18:25
Yes, an additional standard deduction is available without itemizing for new car sales taxes and Re taxes. I think new Sch L will be used to document these, but if a taxpayer qualifies, the standard deduction is increased.