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Old 01-30-2012, 08:55 AM
jtgain jtgain is offline
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Tax Question re: Roth Conversions

I recently returned to law school so my wife is shouldering the burden of supporting the household through the following year. So, in anticipation, I decided to claim as much income as possible during these down years so as to pay a lower tax rate than I would when I work as an attorney in later years.

So, in 2010, I converted all of my Traditional IRAs over to Roth IRAs. I took advantage of the provision that allowed me to split the taxes between 2011 and 2012 tax years (both years where I would be making little income, starting in 2013, I will be working full time again)

Here is where I hit a snag and have two questions:

1) In 2010, I was living in Florida which has no state income tax. Last year (and next year) I will be living in West Virginia which does have a state income tax. My contention is that I was "billed" for the Roth conversion in 2010 and simply deferred payment on those taxes. Now, the state of WV is claiming that I owe them income tax on those deferred amounts, but I contend that "income" was earned when I was a Florida resident. I don't see how WV can claim a slice of that pie, but I do believe that is an argument I will lose. Any suggestions?

2) Mostly because of #1 (and my own stupidity for not adjusting the wife's withholdings properly) I owe a few hundred bucks in state and federal taxes. I can, however, contribute some money to a traditional IRA to lower that tax bill and actually get a few hundred dollars in refund money.

My second question: If I contribute to a traditional IRA before April 17, 2012 and claim it on my 2011 taxes, in say, 6 months, can I roll that over to the Roth IRA so I am paying taxes on this (2012) tax year instead of next or is there a minimum wait time?

Thanks in advance.

Last edited by jtgain; 01-30-2012 at 08:57 AM..
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  #2  
Old 01-30-2012, 12:41 PM
iamthewalrus(:3= iamthewalrus(:3= is offline
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You probably need to speak to an actual accountant for these questions. They're complicated enough that messages boards may not provide the level of certainty you'd want for such decisions.

1. According to several websites I found, you're not splitting the tax on the conversion over two years, you're splitting the income. Here's the New York State CPA Association publication on it

Quote:
Originally Posted by NYSCPA
Under TIPRA, she will report half of the earnings in income in 2011 and half of the earnings in income in 2012
So, it sounds like you would owe state taxes on that income, unless there's some other provision that directly addresses state tax.

2. I don't believe there's any time limit. I think (though I am not sure) that you can contribute to a Traditional IRA and then do the conversion immediately, even within the same tax year.

You might want to try the bogleheads message board (diehards.org). I've gotten good and well-cited financial advice there before.
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Old 01-30-2012, 05:08 PM
dracoi dracoi is offline
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I'm pretty sure the walrus has got the right answers on these (short of being a specialist in WV taxes).

In regards to splitting the income, it really is income that was deferred and not just tax. For example, if you had a 10% tax rate in 2010, but 25% in 2012, you're stuck recognizing the second half of the conversion at 25%. That's why careful planning was necessary before making the election, and some people are definitely going to be hurt by changes to their tax situation.

That said, the income is probably still attributable to the state you lived in during 2010. Whether that helps this year with WV really depends on state law. You might be out of luck.
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Old 02-01-2012, 11:39 PM
bahia hombre bahia hombre is offline
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http://www.irs.gov/pub/irs-pdf/p590.pdf (p.60)

"How to treat 2010 conversions to Roth IRAs: If you converted amounts from a traditional IRA in 2010 to a Roth IRA, any amount you have to include in income as a result of the conversion is generally included in income in equal amounts in 2011 and 2012. "

So WV gets to tax the 2011/2012 income, unfortunately.
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Old 02-02-2012, 01:24 PM
Mama Zappa Mama Zappa is offline
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Quote:
Originally Posted by jtgain View Post
...

So, in 2010, I converted all of my Traditional IRAs over to Roth IRAs. I took advantage of the provision that allowed me to split the taxes between 2011 and 2012 tax years (both years where I would be making little income, starting in 2013, I will be working full time again)
...

1) In 2010, I was living in Florida which has no state income tax. Last year (and next year) I will be living in West Virginia which does have a state income tax. My contention is that I was "billed" for the Roth conversion in 2010 and simply deferred payment on those taxes. Now, the state of WV is claiming that I owe them income tax on those deferred amounts, but I contend that "income" was earned when I was a Florida resident. I don't see how WV can claim a slice of that pie, but I do believe that is an argument I will lose. Any suggestions?....
My state (the "other" Virginia) just takes your taxable income from your Federal taxable income for that year, with a few adjustments. When you did the deferred tax thing, is that handled by basically taking the income itself in two years? e.g. you converted 50,000, so you threw 25,000 in income for 2010 and 25,000 for 2011?

If that's the way you handle a conversion, then WV probably has every right to collect their share of taxes on the 2011 portion of the income.

You could, I suppose, amend your 2010 federal return, claim the whole 50,000 on that year, and pay whatever additional taxes, interest and penalties that would be due as a result of doing so. However, I suspect that is a lot less than the WV state tax on the 2011 portion of the conversion.

Re the rollover of money converted this year: I believce - but please verify this with someone who knows what they're talking about - that you could basically roll it over the next day. In fact you're better off doing so sooner than later, as you have to also roll over (and pay taxes on) any associated income. Doing it sooner means less income to have to deal with.
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  #6  
Old 02-03-2012, 03:37 PM
dracoi dracoi is offline
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Quote:
Originally Posted by Mama Zappa View Post
You could, I suppose, amend your 2010 federal return, claim the whole 50,000 on that year, and pay whatever additional taxes, interest and penalties that would be due as a result of doing so. However, I suspect that is a lot less than the WV state tax on the 2011 portion of the conversion.
Unfortunately, the OP cannot amend at this point. The election became irrevocable after the due date (plus extensions) of the 2010 return (i.e. after 10-15-11 at the latest).
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