By Joe Cicchinelli, IRA Technical Expert
Follow Me on Twitter: @JoeCiccEdSlott
As we gather our information to prepare our federal income tax return for 2012, don't forget about that Roth IRA conversion you did all of the way back in 2010. A conversion you did from a company plan or IRA to a Roth IRA in 2010 will likely need to be reported on your 2010 tax return.
Before 2010, there were restrictions on who could convert IRA money to a Roth IRA. For example, if you were single or married filing jointly, your modified adjusted gross income (MAGI) had to be less than $100,000 for the year to be eligible to do a conversion. If you were married filing separately, you could not do a Roth IRA conversion, even if your MAGI was less than $100,000.
Starting for 2010, the Tax Increase Prevention and Reconciliation Act (TIPRA) eliminated the $100,000 income limit, allowing you to convert your IRA to a Roth IRA, no matter how much your MAGI was for the year. Also, if you are married filing separately, you are now eligible for a conversion. Basically, every IRA owner could convert to a Roth IRA starting in 2010.
What is the general rule? When you convert IRA or company plan money to a Roth IRA, the conversion is taxed for the year the money was distributed from the retirement plan. But there was a special 2-year tax break for conversions done in 2010. Unless you chose to have the entire conversion amount taxed in 2010, none of the income from the conversion was taxed in 2010; instead, half of the income was taxed in 2011 and the other half in 2012.
If you did a Roth IRA conversion in 2010 and took advantage of the 2-year special tax break, remember that the remaining half of that 2010 conversion amount is taxable for 2012. To figure what’s taxable for 2012, simply go to your 2010 copy of IRS Form 8606, and look at the amount in line 20b, Amount subject to tax in 2012. This is the amount of income that needs to be added to your 2012 federal income tax return (IRS Form 1040).
If you took a distribution of any 2010 conversion funds in either 2010 or 2011, the amount to be included in income for 2012 should be reduced. The reduction would be calculated on Form 8606 in the Distributions from Roth IRAs section of the form.
• If you did a Roth IRA conversion in 2010 and used the special 2-year tax rule, half of that income is taxable for 2012
• Your 2010 IRS Form 8606 will tell you what amount remains to be taxed for 2012.