Taxes on Roth Conversion when owner dies
Good morning. I had a question pertaining to the taxes that will be due on a Roth Conversion.
Let’s say you have a client who converts his Traditional IRA for $250,000 in June of 2010. He is contemplating whether to spread the income of $125,000 over his 2011 and 2012 or have it all applied to 2010 tax return.
He dies in January 2011. I would assume his estate would be responsible for the taxes. Would it still be allowed to spread income into 2011 and 2012? If so, then the estate would also have to file estate tax returns in 2011 and 2012 as well?
Your input would be greatly appreciate.
Thank you,
Brian
Permalink Submitted by Alan Spross on Mon, 2010-05-03 18:38
The income for a decedent who had done a 2010 conversion must be reported in the year of death. However, there is an exception for a sole surviving spouse beneficiary who can use the same options that would have been available to the deceased spouse had they lived. The executor also has the option to recharacterize the conversion by the extended due date if they wish.
The estate tax situation depends heavily on what is done with respect to the estate tax in 2010 with respect to any retroactive restoration vrs the current law in which the estate tax has been eliminated for 2010 only. If restored, the applicable unified credit would apply based on the year of death. Since the taxes can only be deferred if the spouse is the sole beneficiary, barring a disclaimer the unlimited marital deduction would apply and would reduce the taxable estate.
Of course, state estate and inheritance taxes present variable situations at the state level.