Roth Conversions and AMT

[Guest quincybadger]

I have been stuck paying the AMT the last few years. If I convert an IRA to a Roth IRA would the payment of tax on that conversion allow me to reduce or eliminate my AMT payments?

[masteff]

That's an excellent question to ask your competent professional tax advisor. AMT is a very specific are of income taxation and outside the general expertise of the benefits professionals on this board.

[Guest quincybadger]

Would it be fair to ask, "Could converting an IRA to a Roth IRA in 2010 help reduce or eliminate the AMT?"? I realize the total tax is going to be the same or higher, but I'm wondering if one would could use this strategy carefully to transfer tax dollars that would have gone towards the AMT and use them to "prepay" the deferred tax liability on the IRA.

[GMK]

From the little I have read about Roths and AMT, it appears that you have to run all the numbers to see if converting to a Roth IRA (and paying taxes now) gives you a better overall tax result than continuing with the AMT, or if it even gets you out of the AMT's expanding reach.

Every year a few million more taxpayers get hit with AMT, and Washington needs the money, so they aren't going to index it to restore it to its original purpose in 1970. If having a Roth keeps you in your tax bracket and lets you keep your deductions for children, state and local taxes, etc., then conversions and rollovers to Roths and Roth 401(k)'s could become hot topics in the benefits world. Perhaps as more people become 'eligible' for AMT each year, we may see more discussion of how to analyze whether a Roth might help.

[Guest seraulu1]

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[Appleby]

Bear in mind too that you can recharacterize a conversion (if done by the deadline). As such, if you convert this year, you can have your competent tax professional two draft tax returns: one with the conversion and the other without. If the one 'with' results in more taxes than you can afford, then you can recharacterize all or a part of the conversion amount.

Of course, conversions done in 2010 comes with a wrinkle- as you have the option to include the conversion amount in your 2010 income, or spread the amount 50/50 over 2011 and 2012.

And...what masteff said