Wisconsin Adopts Federal Treatment of Roth IRA Conversions and More

On March 15, 2010, Governor Doyle signed 2009 Act 161. The Act adopts the federal tax treatment of Roth IRA conversions. As a result, all taxpayers, regardless of their income, may now convert a traditional IRA to a Roth IRA. In addition, for both federal and Wisconsin purposes, a taxpayer who makes a Roth IRA conversion in 2010 may recognize half of the converted amount as income for 2011 and the other half as income in 2012.

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.

Lastly, Act 161 adopts for Wisconsin tax purposes the federal changes made by the Heroes Earnings Assistance and Relief Tax Act of 2008. That Act:

• 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.

Differences between federal tax law and Wisconsin tax law are an irritant to Wisconsin taxpayers. 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 a Wisconsin penalty.