Backdoor Roth IRA conversion - Why am I paying state tax this year but not last year?

Wait, so does that mean I should be looking at the "basis" of my Traditional IRA contributions? I thought with a backdoor Roth you always contribute to Traditional with after-tax dollars, then immediately convert to avoid any earnings accumulating. Does how long I wait between contribution and conversion matter for state taxes? Also, I definitely didn't move - same state both years. Could it be that my tax software just messed up last year?

Yes, the basis of your Traditional IRA contributions is important. With a proper backdoor Roth, you make a non-deductible contribution to a Traditional IRA (after-tax dollars) and then convert it to a Roth IRA. If you convert immediately, there's typically no earnings to be taxed. However, if there were any earnings between contribution and conversion, those earnings would be taxable. It's entirely possible that your tax software handled the situation incorrectly last year. Tax software isn't perfect, especially with more complex situations like Roth conversions. I'd recommend reviewing both years' Form 8606 (which tracks non-deductible IRA contributions and conversions) to see if there are any differences in how the conversion was reported.

How does this taxr.ai thing work exactly? I've never heard of it before. Is it like TurboTax or something different? I'm having similar issues with my Roth conversion taxes being inconsistent between years.

I'm skeptical about using AI for tax advice. Did it actually show you the relevant tax code or just give you a generic explanation? I'm confused because my accountant told me that Roth conversions are treated the same at state level as federal in my state.

It's not like TurboTax at all actually. You upload your tax documents or transcripts and it checks them for errors or missed opportunities. It's more like having a tax pro review your stuff but way faster and cheaper. It specifically looks at your forms and finds issues based on actual tax laws. The AI absolutely showed me the specific state tax code section - that's what impressed me. It didn't give generic advice at all, but actually cited my state's specific treatment of Roth conversions with the relevant code sections. Your accountant might be right for your state, but that's the thing - states vary wildly in how they treat conversions. Some follow federal rules but many don't.

How does this callback service actually work? Sounds too good to be true that you can just skip the phone lines. Does it work for the IRS too or just state tax departments?

Yeah right. No way they got you through that fast. I've been calling my state tax office for weeks. Even if they did, I bet they charged a fortune for it. What's the catch?

It's super simple actually - you enter your phone number and what department you're trying to reach. Their system basically waits on hold for you and calls you back when a real person answers. Worked for both my state tax department and the IRS when I had questions. The skepticism is totally fair - I didn't believe it would work either! But there's no catch other than it saves you from waiting on hold yourself. And no, they don't charge a "fortune" - it was way less than I expected given how much of my time it saved. After spending 4 hours on hold previously, it was completely worth it to get an actual answer about my Roth conversion state tax situation.

Yes, California does tax Roth conversions. They generally follow federal treatment, so if it's taxable federally, it's taxable for CA too. But with a true backdoor Roth (non-deductible Traditional IRA contribution immediately converted), you'd only owe taxes on any earnings that occurred between contribution and conversion. If you do the conversion immediately after contribution, there should be minimal or no earnings, so minimal or no tax. Just make sure you file Form 8606 correctly to document the non-deductible contribution and conversion.

Thanks for explaining! So basically if I contribute and then convert right away (like same day or next day), I shouldn't have much if any CA tax since there won't be earnings? That makes sense. Do you happen to know if there's some kind of special form I need to fill out for California specifically? Or is the federal Form 8606 enough?

You're definitely not alone. The whole system is needlessly complicated. The backdoor Roth exists because Congress wants to limit direct Roth contributions for higher income earners, but then left this "backdoor" open. It's like they want to pretend they're limiting it while actually allowing it if you know the secret handshake. And yeah, the state-by-state differences are a nightmare. I've done backdoor Roths in 3 different states over the years and had 3 completely different tax experiences. The worst was when I moved mid-year and had to figure out how each state wanted their portion!

Glad I'm not the only one frustrated! That mid-year move situation sounds like an absolute nightmare. I didn't even think about that complexity. It really does feel like a secret handshake situation. If you're savvy enough to know about the backdoor method, you can contribute regardless of income, but if not, you're just out of luck? Makes no sense from a policy perspective.

This is really helpful advice! I never thought to compare Form 8606 line by line between years. That makes total sense that the devil would be in those details. The "conformity" issue you mention is particularly interesting - I had no idea that states could independently change how they handle federal tax treatments. That would definitely explain why my situation seemed identical but the tax outcome was different. It sounds like I need to do some digging into whether my state made any policy changes specifically around Roth conversions. Do you know if there's an easy way to find out about these state-specific policy changes? I'm wondering if there's some official notice or bulletin that gets published when states change their retirement account tax treatment.