Andrew,

In the 2010 tax year, we converted our IRA accounts into ROTHs. Total amount was approx 120000, with a basis of 36000. (As a side note, we contributed deductible 10000 to our traditional IRAs because for 2010 we don't have any employer sponsored plans. This 10000 was subsequently converted to ROTH as well... so i know we are essentially paying tax on it)
My tax program now calculates that i owe approx 12000 in fed and 5000 in state taxes (accounting for all other deductions/loss carryovers/and IRA conversion "Income"). My question is, because of these amounts, I owe penalties for underpaying taxes. Does the tax law that allows for these ira conversions not allow an exception for huge tax debts due to conversion and not for true underpayment? Or is my tax program not with it and shoud know that there is no tax penalty because i only underpaid the taxes because of the conversion?
I hope this was clear.
Rick

Your tax program should give you the option of reporting this income over the next few years - half in 2011 and half in 2012 - instead of reporting 100% of the the Roth conversion in 2010. This will allow you to either increase your withholdings at work or submit quarterly estimates to pay the taxes on the Roth conversion over the year, and avoid being hit with any underpayment penalties.

Take a look at the check box on the top of page 2 of the Form 8606. If this box is checked, you are reporting all the income from the Roth conversion on your 2010 return.

Deferring the reporting of this income may not make sense, however, if you expect your income to increase siginificantly in either of the next two years.

I hope this helps you out.

Zip Code: 01801

That makes sense, thanks. My income will be increasing over the next two years (approx 20,000) each year. i'm not sure if that is substantial by your definition but that is why i was planning on paying all the taxes this year. sounds like i will have to just pay the penalties.

Thanks again, your answers are always very helpful.