March 19, 2010 - Gov. Jim Doyle has added his signature to 2009 Act 161, which adopts the federal Internal Revenue Code changes allowing Wisconsin residents to convert a tradition IRA to a Roth IRA, regardless of their income. Act 161 also adopts the federal defined contribution plan and IRA contribution limits for 2011. Without this change, Wisconsin’s contribution limits would have reverted to those in effect in 2001.
The bipartisan legislation, authored by Rep. Louis Molepske (D-Stevens Point), Sen. Jim Sullivan (D-Milwaukee), Rep. Pat Strachota (R-West Bend) and Sen. Glenn Grothman (R-West Bend), was supported by the State Bar of Wisconsin Taxation Law and Real Property, Probate and Trust Law sections.
For many years, certain individuals have been eligible to convert a traditional IRA to a Roth IRA. Eligible individuals are those whose modified adjusted gross income (AGI) for the year of conversion is $100,000 or less and, if married, file a joint return for the year of conversion. Wisconsin has regularly adopted this provision when it has updated its definition of the Internal Revenue Code.
The Tax Increase Prevention and Reconciliation Act of 2005 (“TIPRA”) eliminated the $100,000 modified AGI limit for Roth IRA conversions, effective on Jan. 1, 2010. It also allowed a taxpayer to report the gross income resulting from a 2010 conversion ratably on the taxpayer’s 2011 and 2012 federal income tax return, unless the taxpayer elects otherwise.
Unfortunately, Wisconsin did not adopt the TIPRA provision eliminating the $100,000 modified AGI limit and allowing deferred reporting for 2010 Roth IRA conversions. The Wisconsin Department of Revenue published a notice on the Roth IRA conversion indicating that Wisconsin taxpayers with modified AGI of $100,000 or more who make a Roth IRA conversion would be subject to taxes and penalties. It also indicated that all 2010 Roth IRA conversions would be fully taxable in 2010.
Wisconsin also failed to adopt the federal provisions of the Pension Protection Act of 2006, which made permanent the qualified retirement account provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 and increased the amounts a taxpayer may contribute to IRAs and retirement plans. By not federalizing this legislation, Wisconsin taxpayers would have seen their contribution limits revert to those in effect in 2001. For example, the 401(k) plan contribution limit in 2001 was $10,500 and the IRA contribution limit was $2,000. No “catch-up” contributions for those age 50 or over were allowed. That compares with the 2010 401(k) plan contribution limit of $16,500 plus an available “catch-up” contribution of $5,500 for those 50 and over and the 2010 IRA contribution limit of $5,000 plus an available “catch-up” contribution of $1,000.
Act 161 also:
Makes permanent the temporary provision that allowed those in the National Guard and U.S. military reserves to make penalty-free withdrawals from IRAs if called to active duty for a period greater than 179 days.
Allows individuals who receive a military death gratuity to contribute it to a Roth IRA even if it would otherwise exceed the annual limit for contributions to a Roth IRA.
Allows reservists called to active duty to make penalty-free withdrawals from health flexible spending accounts.
Excludes from an individual’s gross income any state or local bonus payment made to a member of the U.S. military or his or her dependents if the payment was made because of the member’s service in a combat zone.
With the adoption of the federal treatment of the above items, Wisconsin taxpayers can take full advantage of federal tax planning opportunities without fear of inadvertently triggering additional Wisconsin taxes and penalties.
The effective date of Act 161 is March 30, which is the day after it is scheduled for publication.
Continue to monitor WisBar.org and visit the State Bar’s Government Relations page for updated legislative information.
By Cale Battles, Government Relations Coordinator, State Bar of Wisconsin
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