Tax implications of opting out of the 2yr deferral
Re: 10/15/2011 as the deadline for opting out of the two year deferral of income from TIRA to Roth conversion in 2010. I’m wondering if there would be significant “interest” due if one paid their taxes on 4/15/2011 planning on using the default option for TIRA to Roth conversion but then decided for some reason by 10/15/2011 to report the income for 2010. As of 10/15/2011 they would owe taxes on the income for 2010 but wouldn’t they also owe interest from 4/15/11 to 10/15/11 and at what rate would this be?
Thanks.
Permalink Submitted by Alan Spross on Sat, 2009-10-17 04:16
To prevent underpayment penalties, the taxpayer should plan to meet the safe harbor requirement of paying in 100% of the 2009 tax liability through withholding or quarterly estimates (110% for 2009 AGI over 150,000). If this safe harbor is met, there is no underpayment penalty (interest due) no matter how much is owed on 4/15/2011. However, there could be interest between 4/15/2011 and the date the extended or amended return is filed (eg in October, 2011 due to late election to opt out of the two year deferral. That interest rate would be whatever the IRS announces for the quarters involved, with the announcement being closer to that period of time.
Meeting that safe harbor is the way to limit interest charges to only a few months time. Of course, if you feel there is a good chance of opting out, even more can be paid in by April to reduce any charges for the 4/2011 to 10/2011 period.
Then, there is also the possibility that your state will not conform to the federal rules and not even allow the two year deferral. States have a very sloppy record of dealing with conformity issues in advance, so you might need to assume your state will require all the conversion income to be reported in 2010. With states bleeding red ink, the chances they will not conform are pretty good. It might be wise to check if your state automatically conforms to federal law, but I have no idea how many states do that.