2010 conversion – to spread or not to spread
Married filing jointly
2010 taxable income ~$175,000 including ~$20,000 state/local tax deduction
2011 expected taxable income ~$210,000
2012 expected taxable income: assume ~$220,000
Deductible contributions converted to roth IRA in 2010 ~$35,000
Question: Pay taxes on conversion in 2010 or spread over 2011/2012?
My thinking: doesn’t matter, but will probably convert in 2010 for simplicity and in case 2012 income is larger than expected. If 2010, $35,000 taxed @ 28% and subject to ~$2,000 AMT. If 2011/2012, $35,000 taxed @ 33% and still subject to extra ~$2,000 AMT over 2 years (no way to avoid AMT to my knowledge as income and state tax deduction will not be changing any time soon). Time value of money ~5%/year vs. extra 5% in taxes (compounding over 2 years negligible).
Any flaws in my logic?
Permalink Submitted by Peter Lingane on Mon, 2011-04-04 05:39
I suggest that you prepare six scenarios in your tax software or that you ask your preparer to run them for you.
Compare total tax with the conversion income in 2010 plus the total tax in 2011 and 2012 to total tax in 2010 without the conversion income plus the total tax in 2011 and 2012 reporting half of the conversion income in 2011 and half in 2012.
If your analysis is correct, this comparison will bear you out. If you have forgotten some nuance, this comparison will point you to the correct answer.
Investigate whether the year in which you report the conversion income for state purposes and/or pay the state tax, make any difference.
Don’t forget the Medicare premium surcharge.
Taxes are too complex, for me, to rely on my intuition.