State Tax Law Affecting Roth Conversions
In 2010, the IRS income limit for Roth conversions is lifted to allow individuals with incomes over $100,000 to convert any amounts to a Roth, subject to income tax on the amounts converted. However, someone said that the individual states have tax laws that also apply to Roth conversions, and that these laws may be in conflict with the IRS. For example, it was said that Wisconsin will impose tax penalties on Roth conversions by individuals with incomes greater than $100K. This was the first time I ever heard that the individual states have anything to say about IRAs, Roths, and so forth. I thought these were strictly Federal tax matters. Is this person correct, and if so how does one check to see what his/her state tax laws are?
Permalink Submitted by Alan Spross on Tue, 2009-12-08 20:46
Some states have laws that automatically conform the state income tax regulations to federal rules. Other states must act, usually through the state legislatures to specifically conform to federal changes. In CA, for example, the state must act in many matters but they do conform to federal law on retirement plan issues. The only way to be sure is to check with your state income tax board or revenue Dept to clarify the state position on 2010 Roth conversions. The federal legislation that adopted the 2010 conversion rules go way back to the TIPRA legislation in 2005. Perhaps your state acted on that 2005 legislation at some point in the past.
If a state retained the 100,000 MAGI limit, it would cause major problems since there is no way to correct a failed conversion at the state level only. Therefore, if a state did not conform to the federal rules, it would probably come in the form of non conformance with the two year reporting deferral. States are deep in the red, so they should be tempted to allow the conversion, but possibly require that the income be reported fully in 2010.