Dear Tax Talk,
My daughter is currently living in London and is just now filing her 2005 tax return as married, filing separately. She was married at the end of 2005 and expected her British husband to file married, filing separately, but that has still not occurred.
She was working and opened a Roth IRA at the time, not realizing that their joint income would make her ineligible, and married, filing separately now is a problem.
Is there some way she can recharacterize her 2005 and 2006 Roth accounts to the traditional IRA now, after the timely filing date has been passed, or will she have to pay the 6 percent excise for each year?
In 2007, you can generally contribute to a Roth IRA if you have taxable compensation and your modified adjusted gross income, or AGI, is less than the limits.
Roth IRA income limits
- $166,000 for married filing jointly or qualifying widow(er),
- $114,000 for single, head of household, or married filing separately and you did not live with your spouse at any time during the year, and
- $10,000 for married filing separately and you lived with your spouse at any time during the year.
The preceding year limits, except for the married, filing separately limit, were slightly less. Because your daughter is ineligible to contribute whether she declares jointly or separately, she had to act timely to avoid the penalty.
A 6 percent excise tax (penalty) applies to any excess contribution to a Roth IRA. An excess contribution is any contribution you make that is more than allowed, and which was not withdrawn in a timely manner. A withdrawal is timely if made prior to the due date of your return, including extensions.
Unlike other penalties, there is no adjustment for reasonable cause. Hence, even if your daughter's circumstances were considered reasonable cause, there is no room in the law for reducing the penalty.
She should withdraw the Roth IRA amounts in 2008 and include any earnings in income in this year. The 6 percent penalty does not reduce the earnings and is not otherwise deductible.
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.