On Jan 24, 8:28 am, "FranksPlace2" <FranksPla...[at]gmail.com> wrote:
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How do you propose recognizing your basis over a year or two?

Dave

FranksPlace2 wrote:
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Understood. However the tax law does not allow you a choice. In fact
quite a few tax laws are expressly designed to force you to do over many
years what you might otherwise want to do in one year.

-Mark Bole

Looks like a lot of accountants follow this thread.

BTW this not a deduction or tax avoidance. It is moving money that has
been taxed from a pre-tax account to an after tax acount. The only
issue is do I do it in 1 year or 20 years.

FranksPlace2 wrote:

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"Several years" at $2k/year would be around $5,000, let's say.

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"A lot of bookkeeping" equals a few simple arithmetic calculations
(basis divided by year-end balance, times annual distribution amount,
then subtract after-tax distribution from basis). Going forward, you
only file the 8606 in years you take a distribution, as already
mentioned it's automatic with tax software. You already know the basis,
and the custodian sends you (and the IRS) the year-end balance.

- quote -

Combined federal and state taxes would be from 15% to 30% of $5,000.
That's a pretty hefty donation, or another way to look at it, your time
spent on the bookkeeping could be valued at a rate of approximately
$1,000/hour. Now, if you happen to live in a state that didn't always
conform to federal IRA deductiblity, I admit that could increase your
bookkeeping requirements somewhat.

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<sarcasm> Wow, what a concept. Why doesn't everybody handle their taxes
that way? </sarcasm> Seriously, exactly which line of your income tax
return are you going to claim this adjustment on?

-Mark Bole

On Jan 24, 9:28 am, "FranksPlace2" <FranksPla...[at]gmail.com> wrote:
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Like so many other things, it comes down to a cost benefit analysis.
Is the amount you would save on taxes worth the bookkeeping? But
really, how much extra work is it? You have to file a form 8606. Tax
software will do that for you. You need to keep track of your basis,
too, but assuming you keep your tax returns, you're doing that already.

- quote -

I don't think the IRS would agree with you. You would essentially be
claiming the deduction you were not allowed in the first place. That
is most certainly material. Besides, that's a lot of risk for
relatively little reward.

- quote -

If you're eligible, you could convert to a Roth. It sounds like you
have quite a sum in your IRA, in which case you wouldn't want to do
this all at once. And you'd have to continue to file an 8606 every
year until the conversion was done. But when the conversion was
complete, you'd have no pre-tax money left, so you'd be done with the
8606.

You should have been filing a 8606 each with tracks the proportional
already-taxed to tax-deferred. When you remove funds in the future,
you must presume the porportion at that time will be removed from
eache category. Then tax will have to paid on the deferred part.
And the 8606 for that year will have to updated to show the decrease
in the taxable part.
The pain is that 8606s have to be filed until the account is emptied,
which could be many decades.

For several years before the Roth IRA was invented, I contributed $2k
per year to my traditional IRA which was not tax deferred. That is I
could not take a deduction for my contribution. Now with my 401k
monies and a lump sum pension payout, the basis (non taxable part) of
my IRA is about 1% of the total.

I understand the rule is I have to prorate the basis over the
withdrawals. So 99% of my withdrawal would be taxable and 1% would be
non-taxable. The percentage would go down over time as future earnings
dilute the basis percentage. This is a lot of bookkeeping for a little
benefit.

One alternative is to forget about the basis and pay taxes twice on the
same money. I would consider it my donation to the federal government.

Another alternative is to recognize it over a year or two. So I reduce
my taxable income by half the basis in the first year and again in the
second year. If caught, I could claim the amount is "not material."

Any suggestions??

Frank