Yes, conversion is unearned income.
If someone can be claimed as a dependent by another taxpayer, then the standard deduction for 2023 is limited to the greater of:
- $1,250, or
- the earned income plus $400 (but the total can't be more than the basic standard deduction for the filing status). (IRS)
Yes, this unearned income is taxed using the parent's margin rate.
No, you cannot reverse a conversion.
To clarify, were these contributions to the traditional IRA made over multiple years? If it wasn’t, then one option would be to amend the tax return and make all traditional IRA contributions nondeductible then the conversion would not be taxable. Please see How do I enter a backdoor Roth IRA conversion? and How do I amend my federal tax return for a prior year?
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