How dependent Roth conversion be taxed?

[DanaB27]

Roth conversions are taxable unless you had a basis. They are included in the taxable income and taxed as ordinary income. They have to be reported on the dependent's return.

To enter a conversion:

1. Click "Federal Taxes" on the top and select "Wages & Income"
2. Click "I'll choose what to work on"
3. Scroll down and click "Start" next to "IRA, 401(k), Pension Plan (1099-R)" 
4. Answer "Yes" to the question "Did You Have Any of These Types of Income?"
5. Click "I'll Type it Myself"
6. Choose "Form 1099-R, Withdrawal of Money from 401(k) Retirement Plans, Pensions, IRAs, etc."
7. Click "Continue" and enter the information from your 1099-R
8. Answer questions until you get to “What Did You Do With The Money” and choose “I moved it to another retirement account”
9. Then choose “I did a combination of rolling over, converting, or cashing out money.” and enter the amount next to "Amount converted to a Roth IRA account"
10. On the "Your 1099-R Entries" screen click "continue"
11. Answer "yes" to "Any nondeductible Contribution to your IRA?" if you had any nondeductible contributions in prior years.
12. Answer the questions about the basis from line 14 of your 2022 Form 8606 and the value of all traditional, SEP, and SIMPLE IRAs

Please see What is My Tax Bracket? for additional information.

[dmertz]

A Roth conversion made by your dependent is required to be reported on your dependent's tax return.

[Jushiwo · Accepted solution]

Thanks so much for the detail steps how to report it in TurboTax.

I did the same as the steps described. This Roth conversion was from a deductible IRA, so it will be taxed, that I understand.  However, what is unexpected and some questions are:
1. Is this amount of conversion considered as unearned income? (I understand it is considered as income, but is it considered as unearned income?)

2. Since the dependent files her own tax return and checked " could be claimed by someone else", what is her standard deduction would be? Would the standard deduction include the Roth conversion amount ?
3. Next even surprisingly, this income is taxed using the parent's margin rate? This is not a investment income but just move to another retirement account.
Finally, is anyway to reverse this conversion? 
Thanks

[DanaB27 · Accepted solution]

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. $1,250, or 
2. 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?

[Jushiwo]

If I go for the option to amended the previous return and mark the IRA contribution nondeductible (year of 2022), do I have to wait until the amended return finished processing and accepted (it usually take a half year plus), before I can file for this year return (2023)? Or I can just file 2023 and take it as nondeductible IRA conversion (or leave a note somewhere saying I'm amending 2022)?

Also it would be a interest charge for the deductible IRA changed to nondeductible IRA for the 2022?

Thanks so much !

[DanaB27]

If you used TurboTax in 2022 then TurboTax will ask for an explanation statement why the basis is different from the previous filed return when you enter the prior basis form the 2022 Form 8606 line 14 on the 2023 return. Here you can say you are amending the 2022 return to correct the basis.

Yes, if you have an amount due when amending the tax return then you might be charged with interest. 

"If you owe additional tax, file your amended return, and pay the tax by the April due date to avoid penalties and interest. Your return will replace your original return. If you file after the April due date, don't include any interest or penalties on your amended return. We'll make any needed adjustments automatically." (IRS)