Conversions from Traditional IRA to Roth - in 2023 TurboTax conversions now taxed just over 50%

[inmanlanier1]

Hello, I retired at 55 and a few years ago started doing conversions from my traditional IRA to Roth.  I stopped doing large ones since now the IRMAA impact can be significant for both my wife and I (she is Medicare next year).

Last year I harvested some gains to get me up to the target IRMAA bracket limit.  I'm using the same 2023 software to predict 2024 (recognizing not exactly the same). 

I have recently discovered that had I done conversions instead of harvesting gains - I would be taxed differently.  It's bizarre - in 2021 and 2022, 100% of my IRA distributions (that were converted) were part of my AGI and taxed accordingly - just as expected.  In the 2023 software, however when I started instead substituting conversions instead of gains - only a little over 50% of the conversion amount is taxable (it ranges from 50.6% at $20K converted to 55.2% taxed of a $200K conversion.  Note - 100% of my IRA is tax-deferred and all questions asked by TurboTax in the step-by-step are normal.  I'm modeling the 1099R just as mine looked in 2021 and 2022 (taxable amount not determined, code 7 distribution (normal) IRA/SEP/SIMPLE box checked.  I am 65 years old.

Has anyone experienced this?  Is this a bug in 2024 TurboTax?  Was there a change in the tax code in 2023?

[VolvoGirl]

What are you entering to test for 2024?  You should enter a 1099R not a 1099B.  Whether you did a conversion, took a withdrawal or "harvested gains" it would be taxed the same.  Are you switching to forms mode and checking the 1040 line 4a and 4b for the taxable amount?

.  @dmertz 

[dmertz]

Examine Form 1040 lines 4a and 4b.  If you see less added to line 4b than the amount you are entering as your Roth conversion, it implies that you've told TurboTax that you have basis in nondeductible traditional IRA contributions.  Also make sure that you are not indicating some amount as having been rolled over instead of converted to Roth.  Examine Form 8606, the basis shown on the IRA Information Worksheet and the details in section B of TurboTax's 1099-R form.

[NCperson]

please clarify what you mean by "harvesting gains"?

if you are entering a 1099B to reflect capital gains from a non-qualified account, it is taxed at the capital gains rate (15% for many taxpayers).

if you distributing money from the Trad IRA as either a Roth conversion or just taking the money, that is taxed as ordinary income.   This transaction would be reflected on a 1099-R.

both entries add the same income to your MAGI calculation to determine any IRMAA impacts, but the income is taxed at different rates.

[dmertz]

The mention of harvesting gains is extraneous information with regard to the concern about how the taxable amount of a Roth conversion is determined.  AGI and tax rate are not factors in determining the taxable amount of a Roth conversion.  (Most of the post seems to be background information unrelated to the actual concern.)

[inmanlanier1]

I have some very long term assets that have high gains.  When my income is at a low level in overall taxation, I choose to sell those assets even though not needed for living, then reinvest. It resets the gain clock.  Its a way of spreading the gains taxes over a longer period versus all at once in the end.  When SS income starts for me, such income displaces the 0% QDI (qualified dividends and capital gains tax) into the 15% bracket.  Now without SS income, I can capitalize on using all of the 0% QDI bracket for my wife and I.  As the other poster states - not necessarily relevant to the question other than TurboTax clearly treating them differently.  100% of the gains tax counted towards my AGI, but a tad over half of the conversion 'income' counted towards my AGI.

That is most certainly relevant when working up the MAGI that is the basis for IRMAA.

[inmanlanier1]

Your point is valid - and I'm doing exactly that.  This is why I'm stymied.  There is absolutely nothing different I've entered for these tests (with the 2023 return) than with prior returns.  Since this IRA is totally tax-deferred - I've never had a situation to enter a split for taxation. When I retired I executed an NUA option to break out all NUA eligible stock into a brokerage account, then had accumulated some after tax funds to pay my cost basis tax obligation).  All post-tax contributions to my 401K were exhausted before I rolled all the pre-tax funds AND my retirement cash balance into my rollover (pre-tax) IRA.

Yes, the 4A and 4B lines are different.  As I stated, they are not fixed - as I test 20K increments - the percentage of taxation creeps up slowly in that low 50% range.  

[inmanlanier1]

"both entries add the same income to your MAGI calculation to determine any IRMAA impacts, but the income is taxed at different rates."  

I'm not sure what you mean by the different rates.  It simply boils down to how much is on line 4 in totally AGI.  IRMA uses MAGI - which is the total gross income plus non-taxable income sources.

[inmanlanier1]

Sorry all - I have not used this forum before and assumed my answers would be grouped with or referencing the author the author of each post.   My replies were in reverse orcer:

1st reply was to NCPerson.  2nd reply was to dmertz, 3rd reply was to Volvogirl

[inmanlanier1]

OK - figured it out.  DMERTZ - you were on track for your tip to check form 8606.  Those numbers were quite hosed up.  I have no clue how they got where they were.  When I made some quick changes (trying to deduce the terminology for some of the lines) - it all came back to 4a being the same as 4b.  As I had thought - what was happening made no sense.  Thanks for the suggestions!