Mistake 1. In 97 I made nondeductible contibution to IRA. In the beginning of 98 before filing 97 tax returned I converted it into ROTH. I did not file 8606 in 97. Recently I found out that there is $50 penalty for not filing the form. Now I have to file 8606 for 98 and show my 97 IRA basis. Is there a way to avoid $50 for 97?

Mistake 2. In 98 I made regular IRA contribution (I am eligible to deduct it for this year). Later I changed my mind and decided that I would rather go Roth. My 101K AGI for 98 allowes me to make Roth contribution, but does not allow me to make conversion. I did not file tax return yet. Is there any way out?
If not, I can deduct my regular IRA contribution, so my AGI falls below 100K. In this case can my husband convert his IRA to ROTH? In other words do IRA deductions affect AGI for conversion purpose?

[[Mistake 1. In 97 I made nondeductible contibution to IRA. In the beginning of 98 before filing 97
tax returned I converted it into ROTH. I did not file 8606 in 97. Recently I found out that there is
$50 penalty for not filing the form. Now I have to file 8606 for 98 and show my 97 IRA basis. Is
there a way to avoid $50 for 97?]]

Just file Form 8606. It is unlikely that you'll get hit with the penalty. If you do, it'll be the first one that I've seen in over 20 years in this business.

[[ Mistake 2. In 98 I made regular IRA contribution (I am eligible to deduct it for this year). Later I
changed my mind and decided that I would rather go Roth. My 101K AGI for 98 allowes me to
make Roth contribution, but does not allow me to make conversion. I did not file tax return yet. Is
there any way out?]]

Sure...you simply recharacterize your traditional IRA contribution to a Roth contribution. You DON'T make a conversion. But you will also have to make sure to REMOVE the traditional IRA contribution deduction from your 1998 tax return. If you have not already filed your 1998 tax return, that would be a snap. But if you've already filed, you be required to file an amended tax return.

[[ If not, I can deduct my regular IRA contribution, so my AGI falls below 100K. In this case can my
husband convert his IRA to ROTH? In other words do IRA deductions affect AGI for conversion
purpose?]]

Sorry, no. One of the adjustments that you CAN'T make to your AGI for Roth IRA conversion purposes is that for a deduction for a traditional IRA. To put it another way, your IRA deduction will NOT reduce your AGI for Roth IRA conversion AGI testing purposes.

The actual language from IRS Publication 590 is as follows:

"Modified AGI. Modified AGI is your adjusted gross income (AGI) as shown on your return modified as follows:

1) Subtract any income resulting from a conversion of an IRA (other than a Roth IRA) to a Roth IRA. Conversions are discussed under Can I Move Amounts Into a Roth IRA?, later. (If this subtraction and the addition under 2 below result in a modified AGI amount that is more than the applicable Roth IRA limit and you have other income or loss items, such as social security income or passive activity losses, that are subject to AGI-based phaseouts, you may refigure your AGI solely for the purpose of figuring your modified AGI for Roth IRA purposes. Refigure your AGI without taking any income from conversions into account. (If you receive social security benefits, use Worksheet 1 in Appendix B to refigure your AGI.) Then go to 2 below to refigure your modified AGI.)

2) Add the following deduction and exclusions:
a) Traditional IRA deduction,
b) Student loan interest deduction,
c) Foreign earned income exclusion,
d) Foreign housing exclusion or deduction,
e) Exclusion of qualified bond interest shown on Form 8815, and
f) Exclusion of employer-paid adoption expenses shown on Form 8839.

CAUTION: Conversion income must be taken into account when computing other AGI-based phaseouts and taxable income for the year. You disregard conversion income only for the purpose of figuring your modified AGI for Roth IRA purposes.

Hope this helps...
TMF Taxes
Roy