Paymnet of taxes for 2010 Roth conversion
My client palns to convert his IRA to a Roth this year. He plans to pay his tax on the convesion in 2011. Question can he pay his full tax libility with his 2011 tax filing rather than splitting in between 2011 and 2012?
Permalink Submitted by Alan Spross on Mon, 2010-08-30 20:01
Yes. He will make that election on the new 2010 version of Form 8606. Reporting the conversion in 2010 income will enable the use of his marginal tax bracket for 2010. He could then convert other incremental amounts in 2011 and 2012 based on his situation as time passes.
He can of course do a partial or full conversion and also do a partial or full recharacterization of a conversion, so in addition to the options for which year he reports the income he has a tremendous amount of flexibility.
Permalink Submitted by Robert Burch on Mon, 2010-08-30 20:57
I did not make my question clear.
Client will conver his traditional IRA to a Roth this year 2010.
Client will defer taxes to 2011 and 2012
Client wants to know if he can pay all the taxes due from conversion on next years (2011) tax return rather than splitting the taxes between 2011 and 2012? He is doing some advanced tax planning and he is projecting a major drop in his income in 2011. Income will be back to normal by 2012.
Permalink Submitted by Alan Spross on Mon, 2010-08-30 21:39
Your question was clear enough, just the first time anyone asked it so I thought you meant something else.
No, the option to report all the income on the 2011 return and none in 2012 is not an option for a 2010 conversion. But if he wants most of the income in 2011, he should just do a large conversion in 2011. If he wants a small amount in 2010, he can do a small conversion in 2010 and opt to report it all for 2010. He can then assess 2012 when that year rolls around.
Another strategy would be to do a large conversion in 2010 and recharacterize it UNLESS it earns an impressive return. If he keeps it he can opt to report it all in 2010 and can then do another large conversion in 2011 to take advantage of his lower tax bracket. The 2011 conversion would be larger if he recharacterized the 2010 than if he didn’t but if he can lock in big gains with a 2010 conversion it will effectively lower the tax paid per dollar in the Roth in 2010.
Permalink Submitted by Robert Burch on Tue, 2010-08-31 15:54
Great I appreciate your help! Thank you!