Could I really have a 50% marginal federal tax rate?

Well, first,

- this may be the best link anyone has ever posted, and I'm getting old) will show how true marginal rates do not reflect the tax brackets we know and love.$6K/$20K is 30%. Odd, but it may be a mix of 28 and 33 bracket. It's really the AMT that nailed you. Yes, this is all possible.And it's why I use the term RothMania to describe the crazy conversions. For most people, a wholesale conversion ($200K - WOW) makes little sense. I don't know if you are splitting over 2011/12, but guessing you're not. Besides AMT, there are other things that phase in over certain income thresholds, but this mostly occurs at income level that are lower than $100K.

...But AMT is only a 26% or 28% rate. There's something else happening here. Look for phaseouts and disallowed AMT preference items.

Yes, but OP stated that a $20K income delta produced $4K of AMT. What let to that, I can't say without sitting down to look at his return.

Well for starters, I would want to be clear that these are really the correct numbers on the return.

So, what you are saying is that on your form 1040, you get the following values. For simplicity, I will look at the amount converted and not the amount recharacterized.

Converted: $60,000 $80,000 Line 44: 6,000 12,000 Line 45: 6,000 10,000 Line 46: 12,000 22,000

And that means that on Form 6251 you end up with: Line 33: 12,000 22,000 (TMT) Line 34: 6,000 12,000 (1040. line 44) Line 35: 6,000 10,000 (AMT)

Is that correct?

Perhaps the income falls into the band where the AMT exemption amount is reduced. That reduction is at the rate of 25% for incomes above the threshold.

But that would still only change a +20k increase in income to +25k for a total AMT increase of around 6,500 to 7,000 which would be overshadowed by the increase in the regular tax.

I suppose knowing what the change in 1040 line 38 (AGI) and line 43 is in the two scenarios would also help.

Roth Conversion 60,000 80,000 Line 38 188,000 208,000 Line 43 94,000 114,000 Line 44 8,000 14,000 Line 45 6,000 10,000 Line 54 2,000 2,000 Line 55 12,000 22,000

So line 43 goes up 20,000 and line 55 goes up 10,000; a 50% marginal tax rate.

Well, I'm not where I can reproduce the example; but I generally don't recommend a conversion above the top of the 15% bracket (and not even above that, when you have 15% dividends. It turns out that those dividends are taxed at 30%!). the best candidates for conversion are those with business losses and lots of itemized deductions. There are some unusual marginal tax rates out there, which is why you need to do 'what-if' analysis, as you did, to make sure you don't pay more tax than you need to. I'd suggest looking at what is the result of completely undoing the entire conversion.

If I completely undo the transaction I pay no tax at all, but then my $25,000 gain becomes completely taxable. Odds are I will have to pay some tax on this eventually, so paying $12,000 tax on a $60,000 conversion isn't too bad, and makes $7,500 of the gain taxfree. If my results are valid (subject of my question), I think a $60,000 conversion is optimal.

I don't know what tax I would have to pay if I put the tax off until

2011/2012; but if the stock market gain holds up, it might be more than this year.

It looks like your filing status is MFJ. The extra 20k of income is taxed at 28% and 33% (the 33% tax bracket starts at $104,625 for MFS) and the extra tax on line 45 would be around 6k.

One question is why is line 45 so low. 8k of tax on 94k of taxable income According to

tax on 94k of income for MFS is $20,442. For Single it is $20,029and for MFJ it is $15,863. So it might be that you have lots of longterm capital gains or dividends. On the AMT form 6251, which is the basis of line 45, long term capital gains and dividends are taxed at 15%. However, these pieces of income lower your AMT exemption. What is form 6251 line 29 (the AMT exemption) before and after. I'm guessing that your AMT exemption is lowered because of the additional 20k and thus more of your other income becomes subject to AMT.

FYI the AMT worksheet is below. For MFS the maximum value is $36,225.

Exemption Worksheet? Line 29 Keep for Your Records Note. If Form 6251, line 28, is equal to or more than: $302,300 if single or head of household, $439,800 if married filing jointly or qualifying widow(er), or $219,900 if married filing separately, your exemption is zero. Do not complete this worksheet; instead, enter the amount from Form 6251, line 28, on line 30 and go to line 31.

1. Enter: ,450 if single or head of household; ,450 if married filing jointly or qualifying widow(er); ,225 if married filing separately . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3. Enter your alternative minimum taxable income (AMTI) from Form 6251, line 28 . . . . . . . . . . . 2.
4. Enter: 2,500 if single or head of household; 0,000 if married filing jointly or qualifying widow(er); ,000 if married filing separately 3.
5. Subtract line 3 from line 2. If zero or less, enter

-0- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.

1. Multiply line 4 by 25% (.

25) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.

1. Subtract line 5 from line 1. If zero or less, enter -0-. If any of the three conditions under Certain Children Under Age 24 apply to you, complete lines 7 through 10. Otherwise, stop here and enter this amount on Form 6251, line 29, and go to Form 6251, line

30 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . © 6.

1. Minimum exemption amount for certain children under age 24 . . . .
2. ,700
3. Enter your earned income, if any (see instructions) . . . . . . . . . . . 8.
4. Add lines 7 and

8 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2. Enter the smaller of line 6 or line 9 here and on Form 6251, line

29, and go to Form 6251, line 30 . . . . . . . . . . . . . . . . . . . . . . ©10.