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Wendy Reed
Wendy Reed, Enrolled Agent
Category: Tax
Satisfied Customers: 3346
Experience:  15+ years tax preparation and tax advice.
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I had a Roth Conversion in 2008. I paid the State and Federal

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I had a Roth Conversion in 2008. I paid the State and Federal income taxes from my Traditional IRA account. I miscalculated and my AGI was over $100 K because the tax payments from my IRA was considered distribution (I am over 59-1/2, so no early withdrawal penalty.) Realizing this in April 2009, I recharacterized a portion of my Roth IRA back into my traditional IRA. When I called my Broker, they said that my State taxes were already paid in 2008, and I will have to claim it as a refund in 2009. Now, in 2010, as I fill my 2009 return, I must declare the $4,050 as income, and pay either 15% or 25% Federal Income Taxes on a Roth Conversion that was recharacterized (I received no benefit, and when I do another Roth Conversion, I will pay income taxes twice). Is there some mechanism that I can avoid claiming the $4,050 as income for 2009?
Submitted: 7 years ago.
Category: Tax
Expert:  Wendy Reed replied 7 years ago.

Thank you for giving me the opportunity to assist you. I will give the best answer that I can with the information provided.


Hello there Lin-Nay,

Did you recharacterize the portion of the Roth by the due date of the 2008 return?

What statement did you get for 2009 that you are saying is taxable now?

Customer: replied 7 years ago.
Form 1099-G from the State of California. Yes, I recharacterize a portion of the Roth IRA before Apr. 15, 2009.
Expert:  Wendy Reed replied 7 years ago.

Customer, the state tax refund and its status as taxable doesn't have anything to do with your Roth recharacterization. Apparently, if you recharacterized the portion of the Roth before the due date, then you should not have paid taxes on that portion---because it is treated as never having been converted.


When an individual deducts state income tax in one year (2008) on his federal return, and then receives a refund of that tax, the refund is taxable as a recovery, up to the amount that it allowed the taxpayer to receive a tax benefit the prior year. You are not paying tax on this twice. Many people think that, but it is not the case.


For example, If your standard deduction for the federal government in 2008 was $10,000, and your itemized deductions were 15,000, then your itemized deductions were $5000 greater than the standard. Then, when you receive a portion of what you deducted back (the state income tax that you took a deduction for in 2008), you have to claim it as income up to the amount that it gave you a tax benefit.


I know it is confusing, but it is your state tax refund that is taxable to the federal government, not your Roth recharacterization.

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