tax reporting for recharacterization | Ed Slott and Company, LLC

tax reporting for recharacterization

Need to recharacterize a conversion done in 2011, I know we can do prior to Oct 15th 2012. Do we have to repot anything on the 2011 return? If so what? Or do we just wait until time we recharacterize this year and send info at that time? Thank you for your guidance SC

The simplest way is to recharacterize now, as that permits you to file your 2011 return without the conversion and with the explanatory statement regarding the conversion and recharacterization. But if you want to utilize the extended due date of 10/15, you can either: 1) File an extension by 4/17 and pay what you expect to owe, then file your return by 10/15 that reflects the recharacterization and the explanatory statement. Perhaps if the conversion gains enough by then you will not even recharacterize, so this allows you to keep your options open longer. or 2) File your return by 4/17 instead of the extension assuming you will recharacterize. Your explanatory statement will have to be limited because you will not know the amount that transfers back to the TIRA, but you should include a statement that you are recharacterizing the entire conversion by 10/15. If you change your mind, you will have to file an amended return. NOTE: You must either file an extension by 4/17 OR your actual return in order to use the extended due date. If you do neither, your regular due date of 4/17 applies rather than 10/15. There are 3 options above, and you need to select the one that you think is best for you.

Useing option two, If individual has already filed but did not include an explanatory statement with it, can they still do the recharacterization? Can they send it in after filing? or do an amended return,or wait until time of recharacterization. Thank you, SC

If they already filed without reporting the conversion, then they must recharacterize prior to 10/15. In that case, they should recharacterize anytime prior to the deadline, but expect to get an IRS inquiry because there was no statement on the return about the recharacterization. When the IRS inquiry comes along, then respond with the recharacterization information and send the IRS copies of the recharacterization showing on the IRA monthly statement. They could also due an amended return just to include the explanatory statement after doing the recharacterization if they wanted to get info to the IRS before the IRS sends an inquiry. But by that time, it may be too late to head off an inquiry due to initial computer matching schedules for the IRS. It probably is not worth the trouble to file an amended return if the only purpose is to explain the recharacterization. If they don't hear from the IRS within the next 10 months, then the IRS will probably figure it out from the 1099R and 5498 issued next January.
seth.meisler@affiancefinancial.com's picture

If an individual converted in 2010 and they are now past the October 15, 2011 date for recharacterization and of course, they find themselves cash strapped? Is it possible to ammend a return and recharacterize? What if they converted in 2010, paid the tax on the 2010 tax return? Is the rule once you've passed the October 15th deadline, there is no possibility of recharacterization?

Correct, the 10/15/2011 deadline is the date that the following options ended: 1) Recharacterizing a 2010 conversion 2) Electing to change the 2010 8606 conversion income reporting from the two year deferral to 2010 or vice versa 3) A combination of 1 and 2 If the recharacterization was done in time, the amended return can be done later. Of course, if the conversion money is in the Roth IRA and taxes were paid for 2010, they could tap the Roth IRA up to their regular contributions and conversion over 5 years old tax and penalty free. If these funds do not exist and they tap the 2010 conversion money there will be a 10% penalty unless taxpayer is 59.5 or has some other penalty exception that might apply. Anyway, many people who converted in 2010 now have gains on this conversion and recharacterizing would send those gains into the TIRA instead of the Roth. If the money is needed for tax payments, perhaps an installment plan from the IRS would help, or taxpayer could simply remove some funds from the Roth IRA allowing the gains to stay in the Roth.
 

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