I had a Roth conversion from a traditional IRA to a Roth IRA in 2020 and 2021. In 2020, I converted most of the fund from the traditional IRA to the Roth IRA but left about $1000 in the traditional IRA. In 2021, I converted the entire amount in the traditional IRA to the Roth IRA. In both years, I contributed up to the limit using after tax money. Now, I am trying to file my PA tax return. I am not sure how to calculate the cost basis for the conversion in 2021. I know that I have $7000 contribution in 2021. That should be part of the cost basis. But, for the $1000 left in the traditional IRA, I do not know how to calculate the cost basis. If I do not count any of the contributions in 2020, would that mean I under-report the cost basis leading to paying higher tax. If I count the whole $1000 in the cost basis, it does not make any sense as part of the $1000 was from the growth in 2020. But, if the cost basis is something in between, how should I calculate it?
Your basis equals the amount converted. A conversion for PA purposes is not a distribution so there is no taxable income because the money stayed in a retirement account.
Brochure: Retirement - Traditional IRAs and Roth IRAs (REV-636)
Pennsylvania does not allow a deduction for traditional IRA contributions so Roth conversions are generally not taxable.
PA says:
The conversion of a traditional IRA to a Roth IRA is generally not taxable. That is, monies transferred from a traditional IRA to a Roth IRA via conversion (whether by a trustee-to-trustee transfer or a roll-over within 60 days) are generally not subject to Pennsylvania personal income tax.
However, any amounts transferred from the traditional IRA that are not put into the Roth IRA, be it by federal income tax withholding or otherwise, are subject to Pennsylvania personal income tax.
In such a situation, basis is allocated pro-rata between the taxable distribution and the non-taxable conversion. If there is a partial rollover/conversion, the basis in the traditional IRA must be allocated pro-rata between the traditional IRA and the Roth IRA.
Thanks for the reply. However, when using Turbotax to do the PA tax return, the software asked me to put in the cost basis. And I tried different numbers and saw that different cost basis did impact the amount of tax due. So, I am very puzzled and not sure how I should put in the cost basis.
Your basis equals the amount converted. A conversion for PA purposes is not a distribution so there is no taxable income because the money stayed in a retirement account.
Brochure: Retirement - Traditional IRAs and Roth IRAs (REV-636)