Taxes on Roth conversion + Income = could be 34%?
We are retired and considering an IRA conversion. Our 2009 Adj Gross Inc was $75,000. If our AGI is the same for 2010 ($75,000) and we convert a $175,000 IRA to a Roth … will our taxable income be $250,000? = putting us in the 34% tax bracket? Will we owe $85,000 for Fed income tax? Yes, I know about the 2 yr deal this yr, but do I have the right thinking as the Roth is paid for?
Permalink Submitted by mk foss on Thu, 2010-12-30 03:32
Hello:
I’m not following your calculations. There is no 34% federal tax bracket; are you adding a state bracket to the mix?
If you add $175,000 to $75,000 gross income – taxable income will not be $250,000. You must subtract itemized or the standard deduction and deductions for exemptions.The 33% federal bracket starts at ~$209,000 of income. Income tax rates are graduated. The tax on $209,000 is $46,763.50 – far from the over $80,000 that you calculated.
When you’re doing a Roth conversion you should consider converting enough to keep yourself in the same tax bracket (if you’re not going to use the 2011/2012 default). If you were in a 25% bracket for 2009 (which starts at taxable income of $67,900 – you could consider converting $60-$70,000 per year to stay within that tax bracket. The Roth loses its luster if you pay more tax to get into it than you will avoid by having it.
Good luck
Permalink Submitted by Georgieanne Ross on Thu, 2010-12-30 04:00
You’re right – it is 33% not 34%. And yes, we are in the 25% Tax bracket right now. Our AGI or Net income was $75,000 with all deductions. Converting the $175,000 IRA to a Roth plus my $75,000 net would give me a $250,000 income for 2010. The $46,763.50 Tax you state for $209,000 is about a 22.5% tax. When I multiply $209,000 x 33% I get $69,970. I must be doing something wrong. Believe me, I like your figures much better! What rate are you using to get the $46,763.50?
Permalink Submitted by Bruce Steiner on Thu, 2010-12-30 14:04
The Roth conversion will likely still make sense even if the tax on the conversion is a little bit more than the tax that would otherwise apply to the distributions. But it may not make sense of the tax on the conversion is substantially higher than the tax that would otherwise apply to the distributions. Of course, each person has to analyze his/her particular situation.
Permalink Submitted by Georgieanne Ross on Thu, 2010-12-30 15:19
Thanks bst+ … I’m fogged here. Please give me hard facts – thanks again.
What would be my taxes due to the Gov. if I had a 2010 Net income of $75,000 plus converted a $175,000 IRA CD to a Roth CD giving me a Grand Income total of $250,000 for 2010? ____________________ And how do you get it?
I have heard that you do the taxes in steps … 15% on the first 22,000 … then 25% on the next amt … and so on What Percent and Steps did you use to get to your figure for me? sincerely “v girl”.
Permalink Submitted by Anonymous (not verified) on Thu, 2010-12-30 16:43
Use the tax rate table for 2010
Incomes between $209,250 to $373,650 pay $46,833.50 + 33% in excess of $209,250
Therefore, for $250,000 it would be $46,833.50 + $13,448.50 = $60,282.00 for an effective rate of 24.11%
Permalink Submitted by Alan Spross on Thu, 2010-12-30 16:44
If you are married and filing jointly, the 2010 tax rates on your taxable income runs through various brackets and in your case would include the 10. 15, 25, 28 and 33% brackets. This all works out to a tax of 46,834 plus 33% of the amount over 209,250, which is 13,448. Grand total 60,282. Effective total tax rate 24.1%.
If you have LT cap gains the tax would be a tad less. AMT not considered and it is also assumed you have already taken out your exemptions and std or itemized deductions.
Total tax would probably be less if you split the conversion between 2011 and 2012 if the other facts remain the same. Tax brackets will only change by inflation amounts between now and the end of 2012.
Permalink Submitted by Georgieanne Ross on Thu, 2010-12-30 18:53
Thanks so much to all of you. I am new at this, as you can tell. I found the Tax Code and 15-25-28% etc. so I know now where I am – thanks again. Wish I had known about all this before. Saw Ed Slott on TV which got me going. Hope I’m not too late. Sure I can capture some of his info. Told my kids to only go with Roth’s … they will eliminate all we are going through. We have lots of money in IRAs which I realize now … is half what we think! UGH!
Permalink Submitted by gerard noronha on Thu, 2011-04-14 18:45
confused about the AMT….when does it kick in…if total income for the year including traditional ira conversion to roth is 120k to 150k..is there a problem with AMT…married filing jointly…please give me some insights or a web page to check it out…tx…gerry
Permalink Submitted by mk foss on Fri, 2011-04-15 03:48
The AMT is not a function of your gross income – it depends on your deductions. If you pay a lot of taxes – income, property, sales – the whole taxes category on Sch A; those are added back in calculating AMT. Also Miscellaneous Deductions are added back. The Medical Expense deduction is refigured and you could have other items treated differently for AMT purposes.
If you got to http://www.irs.gov and search in forms and publications for AMT you should find some information.
Permalink Submitted by gerard noronha on Fri, 2011-04-15 14:05
the info I gave is not correct…i do not itemize…taxable income for 2011 approx…96K…at what point will AMT trigger..I would like to do a roth conversion for another 20-30 K….I know it is a complicated tax