Timing, Taxes, and Conversion to Roth from IRA
My wife and I both had long term IRAs. In April, we withdrew and converted to ROTHs intending to take advantage of the two year tax window. Wife passed away in July. AGI is low six figures from investment income. It seems that I can continue with the intended process and file taxes this year jointly, deferring the conversion income till next year. I assume that I will have to file a tax form for her estate, to pay that years tax, even though no other income will come to her, but would that be a single filing using the standard exemptions for her filing, and the same for mine, thereby, (I think) getting the advantage of two years of additional standard exemptions against her income for the conversion, or am I missing something here.
Permalink Submitted by Alan Spross on Thu, 2011-02-17 00:24
Assuming you are the sole beneficiary of her Roth IRA, you have several options:
1) Recharacterize all or part of her conversion
2) Opt to report her conversion fully in 2010 and defer your own for two years
3) Combine the above two options
4) Continue the original deferral plan for both of you.
Under the 4th option, the Regs from the 1998 initial Roth conversions spread over 4 years are now applied to 2010 conversions. As sole beneficiary of her Roth, YOU could simply report her deferred income for 2011 and 2012 on your own return. Perhaps the 2011 version of the 8606 will continue a specific line or two to make this election, but you would not get an additional exemption or standard deduction. This income would NOT run through her estate on a 1041 or K1 even though that income would have ended up on your future returns anyway.
I can’t tell the exact method of reporting since the current 8606 has no need to address this because 2010 decedent’s conversion will either be reported on their final return or joint return for the year and there is no deferral until 2011.
You might want to consider some combination of the first 3 options above since your marginal bracket may increase for the next two years due to filing single and/or other changes in your income.
Note: You probably own her Roth now, but if you recharacterize any part of her conversion, it would go into YOUR TIRA and as an outstanding recharacterization on 12/31/2010, it would increase your 2011 RMD.
FYI: Here is a copy of the IRS Reg 1.408A showing the provisions quoted above. For 2010 conversions, the tax bill just changes the year and the 4 year to 2 years:
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Q–11. What happens when an individual who is using the 4-year spread dies, files separately, or divorces before the full taxable conversion amount has been included in gross income?
A–11. (a) If an individual who is using the 4-year spread described in A–8 of this section dies before the full taxable conversion amount has been included in gross income, then the remainder must be included in the individual’s gross income for the taxable year that includes the date of death.
(b) However, if the sole beneficiary of all the decedent’s Roth IRAs is the decedent’s spouse, then the spouse can elect to continue the 4-year spread. Thus, the spouse can elect to include in gross income the same amount that the decedent would have included in each of the remaining years of the 4-year period. Where the spouse makes such an election, the amount includible under the 4-year spread for the taxable year that includes the date of the decedent’s death remains includible in the decedent’s gross income and is reported on the decedent’s final Federal income tax return. The election is made on either Form 8606 or Form 1040, in accordance with the instructions to the applicable form, for the taxable year that includes the decedent’s date of death and cannot be changed after the due date (including extensions) for filing the Federal income tax return for the spouse’s taxable year that includes the decedent’s date of death.
(c) If a Roth IRA owner who is using the 4-year spread and who was married in 1998 subsequently files separately or divorces before the full taxable conversion amount has been included in gross income, the remainder of the taxable conversion amount must be included in the Roth IRA owner’s gross income over the remaining years in the 4-year period (unless accelerated because of distribution or death).
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Permalink Submitted by bill weaver on Thu, 2011-02-17 06:37
thanks, I thought it might be too good to be true that I could get that deduction. I thought about it after posting the question, and realized that there is not likely a basis for the deductions, wince there was no living person to accumulate those costs. Thanks for pointing out my options. I think I will likely do the combo thing.