Help, problem with Roth conversion done in 2010

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peter2010
Posts: 19
Joined: Sun May 02, 2010 9:52 am

Help, problem with Roth conversion done in 2010

Post by peter2010 »

I am a Canadian currently living in Asia.

I worked in the US for 12 years and before leaving US I converted my IRA to Roth IRA in 2010. When I filed my 2010 tax return (1040), I filed form 8606 indicating that I would defer taxes on the conversion to 2011 and 2012. Also I converted a small (5K) IRA to Roth in Jan 2011 before establishing residence in Canada.

When I filed 2011 tax return I filed 1040NR as I am no longer living in the US. I included 50% of the amount from 2010 conversion (plus 5K conversion done in 2011) and paid tax at the standard rate. But I received a letter saying that I made an error and the calculated tax that I owe according to IRS is 30% of the full amount of conversion (full amount for both 2010 and 2011).

My question is as follows:

- do you have to be a resident of US for the 2011/2012 deferal to be effective?

- does the conversion amount get taxed at 30% rate rather than the standard tax rate? Again does residency have something to do with rate?

- even though I am Canadian I filed 1040NR with an address in Asia (rather than a Canadian address). Would this make any difference?

I thought I did the right thing when I converted in 2010 and deferred paying taxes until 2011 and 2012. But if there is a residency cluase related to Roth conversion, I think it was a big mistake.

Please help with any advice.
nelsona
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Post by nelsona »

The IRS is correct, however, as a Cdn citizen, you have the right to file a FULL 1040 (instead of 1040NR) to determine the tax on your world income (including this Roth conversion.

To your questions:

You did not have to be a resident to use the deferral. In fact, you DID use the deferal. However the TAX on the deferred income, was determine correctly, on the basis of you filing a 1040NR, and this being non-connected income. You can file a 1040 instead if this helps, but again, this would include world income.


The 30% rate is correct based on your residency.

The fact that you are cdn would entitle you to file a 1040. Even if filing 1040NR as a Cdn, there is no special tax rate for the income fropma roth conversion.
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best
peter2010
Posts: 19
Joined: Sun May 02, 2010 9:52 am

Post by peter2010 »

Thanks nelsona for a quick response.

Your response raises some further questions:

- is it now possible to file 1040 after having filed 1040NR for 2011?

- if I can file 1040 for 2011, would the tax rate be based on the standard tax table rate and not straight 30%?

- IRS calculated 30% tax on the full amount converted in 2010 and not just 50%. Why would this be if I can defer 50% until 2012?
nelsona
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Post by nelsona »

I'm not sure that you can switch, but I don;t see why not. You would need to make a treaty-based request (Form 8833).

The taxrate would be based on the tables, but as I pointed out you would need to report all income, and then use exemptions, ceridts and dedections to lower your US tax on all income, not just the Roth conversion.

The roth conversion deferal was available to non-residents, so there is no reason to lump the convesrion in 2011

http://www.irs.gov/retirement/article/0 ... 32,00.html
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best
testone
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Post by testone »

"The fact that you are cdn would entitle you to file a 1040."

Just curious, where does the treaty say this?

Under US domestic law the residency termination date may be Dec. 31, but this is not specific to Canadians.
nelsona
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Post by nelsona »

Article XXV(1). I've explained this dozens of times.
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best
nelsona
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Post by nelsona »

A Cdn can ALWAYS file a 1040, regardless of where they live.
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best
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