2017 Roth Conversion/Re-Characterization & ACA Subsidy Credits
I have a client who converted $46,500 from a traditional to a Roth in 2017. He then re-characterized the same amount back to traditional in May 2018.
His CPA is now preparing his 2017 1040 and says,….
1. The $46,500 Roth conversion will count as income for 2017.
2. Thus, he will be charged back a little over $4k in subsidy credits he received toward insurance premiums in 2017 under the Affordable Care Act.
My understanding is,…
1. The CPA will need to file a 1040x for 2017 to show the re-characterization which will remove the $46,500 from MAGI
2. So, won’t the client keep the credits and avoid repayment of the $4k charge back?
Thanks, in advance, for your expertise!
Permalink Submitted by Alan - IRA critic on Mon, 2018-07-30 16:27
You are correct. Tnhe ACA credit will be computed without considering the portion of the conversion that was recharacterized and the 2017 return will not report the portion of the conversion that was recharacterized. A timely extension had to be filed by 4/18/2018 in order for the recharacterization to be valid or the original return needed to be filed by that date. The return should include an explanatory statement explaining the date and amount of the conversion, the date and amount of the conversion that was recharacterized, and what the recharacterized amount was worth at the time of the transfer. Those figures should be confirmed by the 1099R issued next January, but coded to apply to 2017. It was not clear whether the return was filed and is now being amended or was extended.
Permalink Submitted by Mitch on Tue, 2018-07-31 12:18
Thank you Alan. Let me clarify,…. A timely extension for 2017 was filed ahead of 4/18/2018. So the CPA is filing the first return for tax year 2017. From your answer, I realize that I was in error thinking the CPA would first file the regular 1040 showing the $46,500 as income from the Roth conversion. Then I thought the CPA would file a 1040x removing the $46,500 as income due to recharacterization. What you are saying is that,… Since an extension was filed and this will be the first return for 2017 reported, all conversion/re-characterization transactions can be quantified on one return (with a thorough explanation as you outline above.) Is there anything else to consider? Thank you as always for your expertise!
Permalink Submitted by Alan - IRA critic on Tue, 2018-07-31 17:08
You are correct. The 2017 return will not report the conversion income, and should include an explanatory statement as indicated earlier. 1040 X is not applicable. The 1099R issued in January coded to indicate that a 2017 conversion was recharacterized should agree with the explanatory statement with the 2017 return. The 2018 return does not report any of this because everything was correctly reported on the 2017 return.