I was out running today when I had a spark of inspiration about a potential tax strategy (my best ideas come in the shower, not on the track!). But, I wanted to bounce the idea off the pros here to see what they think.

In 2013 all of my wages will qualify under the Foreign Income Tax Exclusion (FIE). I will have some passive income in the US but not really enough to move the needle. Here's my question: If I do a traditional IRA to Roth IRA conversion in 2013 will the marginal tax on the conversion amount be a function of my income without the FIE. Or, as I'm expecting, will the IRS make me pay the a marginal tax on the conversion as if I earned the foreign income in the US.

Perhaps an example is an easier way frame the question:

Wages: $60K (assume no other income, for simplicity)
Foreign Income Exclusion: $60K
(potential) IRA conversion amount: $50K


No IRA conversion: AGI = Wages - FIE = 60K - 60K = 0

IRA conversion: AGI = Wages - FIE + IRA conversion = 60K - 60K + 50K = 50K

So, if I do the IRA conversion, I'll be taxed on the 50K of conversion. But, my question is, will I be taxed on that 50K AS IF it were dollar 1 through 50,000? Or, as I'm guessing, will I have to pay tax on the 50K AS IF it were dollars 60,001 through 110,000 (even though the FIE lets me forgo paying tax on dollars 1 through 60,000)?

I know it's a little complicated. But, I bet you can imagine why I'm asking the question...