I did a IRA conversion in 2016 for $3,082. I received a 1099-R and input all of the information into TurboTax. Here are the details contained in my 1099-R:
1) Gross Distribution: $3,082. 2a) Taxable Amount is $3,082. 2b) "Taxable Amount Not Determined" & "Total Distribution" boxes are checked. 4) Fed. Income tax withheld is $0. 7) Distribution Code: 2, IRA/SEP/SIMPLE box is checked.
When I input my 1099-R data into the program, my Federal Tax owed increased by $908 and CA State tax owed increased by $124 for a combined total of $1,032 taxes due on the conversion. I completed the entire "Retirement Plans & SSN" section.
How do I owe 33% of the conversion amount in taxes if my total income for 2016 was $26,745 (including the conversion) and my taxable income was $16,160? There should be no penalties assessed on the conversion (hence the Distribution Code 2). My federal tax rate is 15% and CA state tax rate is 4%. Does anyone understand why this IRA conversion is being taxed at such a high rate?
