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Reporting 2010 Roth Conversions in 2011 Tax Returns

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With the elimination of the $100,000 gross income cap in 2010, individuals had the opportunity to convert traditional IRA’s to Roth IRA’s. Taxpayers who converted had the choice between paying all of the related income tax on the 2010 tax return, or spreading the conversion income equally between 2011 and 2012 tax returns.

The 2010 conversions were reported on Form 8606, Nondeductible IRAs, by listing the conversion amount on Part II, lines 16 and 18. If a taxpayer elected to pay all of the tax in 2010, the box on line 19 was checked and the amount listed on line 19 carried to the first page of Form 1040, line 15b, taxable IRA distributions. The conversion amount then became part of adjusted gross income and was taxed at the taxpayer’s 2010 tax rate.

If a taxpayer elected to defer the tax, Form 8606, lines 16 and 18 were completed as mentioned. The difference was that line 19 was blank and lines 20a and 20b each listed 50% of the conversion amount to be reported on the 2011 return (line 20a) and the 2012 return (line 20b).

Traditional IRA’s to Roth IRA’s - what to report in 2011 for 2010 conversions
If no part of the 2010 conversion to a Roth IRA was distributed in 2010 or 2011, the amount that was reported on the 2010 Form 8606 line 20a should be reported on the 2011 Form 1040 line 15b, taxable IRA distributions.

However, if part of the 2010 conversion to a Roth IRA was distributed in 2010 and reported on the 2010 tax return on Form 1040, line 15b, taxable IRA distributions, the 2011 portion of the 2010 conversion amount to be reported is a little more complicated. The smaller of the “amount subject to tax in 2011” (2010 Form 8606, line 20a) or the remaining taxable amount of the conversion would be reported on the 2011 Form 1040, line 15b, taxable IRA distributions. For example, assume a taxpayer converted $50,000 from a traditional IRA to a Roth IRA in March 2010, and then received a distribution of $30,000 in August 2010 from the converted IRA, leaving $20,000 in the converted IRA. Even though the taxpayer elected to defer the tax by spreading the conversion income equally at $25,000 for both 2011 and 2012, only $20,000 would be taxable in 2011 and none of the 2010 conversion income would be taxable in 2012.

If amounts from the 2010 conversion from a traditional IRA to a Roth IRA are distributed in 2011, a 2011 Form 8606 Part III must be completed to determine the conversion amount to report in 2011.

Qualified retirement plans to Roth IRA’s - what to report in 2011 for 2010 conversions
Some taxpayers may have converted a qualified retirement plan to a Roth IRA in 2010 and reported an amount on Part III, line 25a of the 2010 Form 8606 (same idea as above, but Part III dealt with qualified retirement plan rollovers to Roth IRA’s). If no part of the 2010 rollover was distributed in 2010 or 2011, then the amount from the 2010 Form 8606 line 25a should be reported 2011 Form 1040 line 16b, taxable pension and annuities.

However, if part of the 2010 rollover was distributed in 2010 and reported on the 2010 Form 1040, line 16b, taxable pension and annuities, the smaller of the amount reported on the 2010 Form 8606, line 25a or the remaining taxable amount of the 2010 rollover would be taxable in 2011 (see above for example).

If amounts from the 2010 rollover from a qualified retirement plan to a Roth IRA are distributed in 2011, a 2011 Form 8606 Part III must be completed to determine the conversion amount to report in 2011.

 
 
 
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