For the Roth conversion, you and your spouse will each need to complete your own Form 8606, and determine your taxable income or loss from these transactions separately.

When you complete your tax returns for 2010, you'll need to report your wife's $12k of income on the IRA line, and then you'll take your $10k loss as a miscellaneous itemized deduction. Since these losses are only allowable to the extent they exceed 2% of your income, and then end up not being allowable if you are in the AMT, there is a good chance that the $10k loss won't save you any federal income taxes.

For your wife's income, don't forget that you can make an election to split her $12k of income over two years, and report $6k of income in 2011 and the remaining $6k in 2012.

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