Tax Preparer 2012 Work Will Include Details of Tax and Penalty for Roth IRA Conversions

When conducting tax preparer 2012 work, many individuals must report income on 2011 tax returns that they didn't actually receive. People who converted traditional retirement accounts to Roth IRAs in 2010 did not incur an immediate tax impact if they elected to defer paying the associated income tax. They are required to report half the taxable income for 2011 and the other half on a tax return for 2012.

Occasionally challenging situations may arise in tax preparer jobs for individuals who converted to Roth IRAs in 2010. Taking money out of a traditional retirement account - even for conversion to a Roth IRA - is a taxable distribution. However, any past contributions to the traditional account that were not tax-deductible are convertible to the Roth without creating any tax due. Only deductible contributions and increases in account value are taxed when converted to a Roth.

This is where IRS tax preparer study becomes crucial. Determination of the tax impact from conversion of a traditional retirement account to a Roth IRA requires knowing a taxpayer's basis in the converted account. This consists of any contributions that were not tax deductions.

The normal tax preparation step for people who convert to Roth IRAs is examination of the 1099-R received by a taxpayer. However, people who converted in 2010 received a 1099 for that year despite not yet paying the tax due. Individuals who elected to postpone paying tax on their 2010 Roth conversions should have reported this circumstance on their 2010 tax returns. Consequently, to meet tax preparer requirements for 2011 tax returns requires some knowledge about the prior year reporting of retirement account distributions.

A tax return preparer should examine Form 8606 in the 2010 tax return to find the figure reportable as income for 2011. If a copy of the 2010 tax return is not available, the 2011 return is prepared by reconstructing the taxable effect of the 2010 conversion. This necessitates having the 1099-R from 2010 and the taxpayer's basis - if any - in the converted traditional retirement account.

If all traditional retirement accounts were converted, the taxable income is simply the 1099-R amount less any basis. Partial conversions are a little trickier. The basis is allocated pro rata between the converted and non-converted quantities. The portion of basis assigned to the converted amount is the non-taxable part of the conversion.

A potentially troubling aspect of adding the tax on 2010 Roth conversions to 2011 tax returns is that taxpayers will owe more tax next April 15 - or have lower than normal refunds. Only taxpayers who increased their tax withholding on paychecks or made estimated tax payments will escape this situation. Even worse news is that anyone who owes the IRS next April is subject to penalty for not paying estimated tax.

IRS Circular 230 Disclosure

Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.

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