IRA conversion to Roth

[MargaretMort]

New Client. They have always done their own income tax. In 2009 he was stationed in mid-East for several months and some of his pay was not taxable. They decided to convert their IRA, one each, to a Roth to "take advantage of his lower taxable income". They showed the changes on their 2009 1040 and paid the tax.

The conversion was not accomplished until April 12, 2010. They have each received a 2010 1099-R showing the distribution. Do I report the 1099-R and add an explanation that the money was taxed in 2009?

Personally, I think they have done the entire thing incorrectly. She told me that they had not put any money into the IRAs for 10 years and had been unable to deduct earlier contributions because of income phase outs. I assume they didn't use Form 8606 during those years to report the non-deductible contributions. I do know they used very small amounts-less than $50 each--as basis so they probably paid too much tax.

Any helpful suggestions are so very much appreciated. I don't even want to talk with them until I have a clear understanding of the best way forward. MM

[MargaretMort]

Help!!!!!!!! Either I didn't state my problem clearly or I am missing an obvious answer. I am only concerned with the fact that the 1099R shows the rollover in 2010 and the taxes were paid in 2009. How do I show this? MM

[Gail in Virginia]

Margaret, the obvious answer is that their 2009 tax return was wrong since no rollover occurred that year. Therefore, the 2009 should be amended to take the rollover off. The taxes that were paid can be forwarded to 2010 tax return, where you will report the rollover normally. To me, the bigger problem is that they have non-deductible contributions with no clear trail of 8606 forms to show what was put in after-tax. Good Luck!

[MargaretMort]

Oh, I agree the 2009 return is incorrect and the lack of an 8606 trail is questionable. According to their 2009 return they each show non-deductible contributions of $3000+ and paid taxes on $20000+ roll-overs. That is a lot of interest but whose to say they weren't correct. She, however, has no understanding of basis. I have told her I need to know how much they each contributed and she said she will get in touch with their broker person. She did tell me that their contributions couldn't be deductible because of gross income.

Just out of curiosity, how do you apply the taxes paid in 2009 to the 2010 disbursement? I guess the 1040-X explanation? MM

[jainen]

>>how do you apply the taxes paid in 2009 to the 2010 disbursement?<<

Presumably when the conversion income is subtracted, Form 1040X will show a refund for 2009. Use Line 22 to apply it to 2010. I suggest you put 2010 on extension for two or three months until the amendment has been processed.