Recharacterization Penalty
Because of the tax increase from 15% to 25% for AGI above $67,900, I thought
I wanted to recharacterize my Roth Account back to that level. (My AGI and
conversion never exceeded the $100,000 limit.)When doing my taxes with Turbo Tax, it wanted to give me a penalty of $900.00 + 6%. How can this be? It appears that I would be better not to recharacterize.
Permalink Submitted by Alan Spross on Wed, 2010-03-10 02:40
It appears that you are doing something wrong in the entry of data.
But first some corrections. The 67,900 you refer to is the top of the 15% bracket for taxable income, so your AGI would be considerably higher than that. Also, the converted amount does NOT count toward your 100,000 income limit for conversions, so you probably easily qualify to convert.
A partial recharacterization would reduce your AGI and depending on other factors may also reduce your taxable income by the same amount and it may make sense to limit the tax bill on your conversion to the top of the 15% bracket. You are probably just entering the recharacterization data incorrectly, perhaps as some sort of distribution.
While I do not know how Turbo tax handles the entry for recharacterization, what happens is that the amount of your taxable conversion is reduced, but no distribution takes place. Does Turbo tax request that your produce a simulated 1099R to enter the recharacterization?