Form 1040 question

Right. It's possible to have more deductions and exemptions that are more than you can use, and the IRA conversion is an ideal way to use up what would otherwise be lost. If you plan to be in the 15% bracket or higher later in life, converting into the 10% bracket actually makes sense. I suggest you convert now, up to $20,000 or so, then sit back and in March, '13 when you do your taxes, recharacterize to put you either at $0 taxable, which is fine, or $8700 taxable which is the full 10% bracket for singles. Whatever you choose, you can take advantage of the deductions without knowing the total number exactly.

If you look at the form itself all is revealed.

Phil Marti VITA/TCE Volunteer Clearksburg, MD

I usually recommend getting to the top of the 15% bracket (and as suggested) a little more in case your itemized deductions turn out to be higher. It means that much less income from minimum distributions once you get to that age.

2. For some reason, I can't find anywhere in the 1040 instructions where it addresses this. I thought I read where if these numbers are less than zero, you basically just make them zero. If that's the case, it seems to me that would basically mean you would lose the effect of many of your deductions.

Although I am not in this situation yet, I may have a scenario coming up where my deductions will be higher than my AGI. I have been assuming that if this happens, the best course of action would be for me to take some of my IRAs and convert them to Roths. This would provide taxable income which would then offset the deductions.

For example, if my AGI is, say, 25,000, my itemized deductions are 35,000 and my personal exemption is 3700, I basically lose the impact of 13,700 in deductions and exemptions. In this case, my thought was that I should take, say, 13700 in IRA funds and convert them to Roths. That would raise my AGI to 38,700, which would then net everything down to zero when subtracting out the deductions and exemption.

Is this is a reasonable approach, or am I missing something? I am age 61, so there are no penalty issues with the IRA funds ============== Unless the instructions specifically tell you to put zero (like they do for line 43, taxable income), you put the actual negative value. You're not missing anything. Note what happens when one has a negative AGI (actually, an AGL).

During 2011 (for an earlier tax year), I won this issue at Appeals in Los Angeles. The tax return in question had a small negative AGI (between $0 and $-10k). The IRS service center made a "correction." I protested, noting that the statutes (IRC sections 67, 165, and 213) all defined the medical, miscellaneous, and casualty/theft losses as the difference between the expense and the AGI floor. Congress made no provision for negative AGI floors to be treated as zero, nor did Treasury via any regulation. As the IRS was unable to cite any authority (revenue ruling, notice, or procedure, or any court case) where these values are treated as zero, Appeals conceded the issue. This result was important since both the business and casualty losses carry back via the NOL rules (2 years and 3 years respectively).

I'm certain that Appeals conceded because of the hazard of litigation. The IRS doesn't want there to be unfavorable [to them] case law on this issue, and they probably considered that if I were to take this to the courts, I'd probably elect OUT of small-tax-case procedure (since I have done that before for a deficiency less than $10k in a situation with no case law history and prevailed). They'd rather have a confused public taking zero for the various AGI floors rather than the real negative percentages.

On page 2 of Form 1040 I see this: 55 Subtract line 54 from line 46. If line 54 is more than line 46, enter -0- . . . . . . ?

So, even if there is a negative number on line 41 or 43, at line 55 the lowest number is zero.

little more in case your itemized deductions turn out to be higher. It means that much less income from minimum distributions once you get to that age.

With the OP at less than zero, we don't have enough info to know what's right. The general "live at 15%" is great, with the range of income at