I contributed $5,500 to a traditional IRA during tax year 2014. My accountant did not take the traditional IRA deduction, apparently I was not eligible for it. My new accountant is telling me to convert that 2014 contribution into a ROTH-IRA, but my custodian is telling me that I will have to pay income on that conversion. However, I did not take any benefit on the initial deduction during 2014. Can someone provide any insight on my options?
Money in an IRA that has both deductible and non-deductible contributions in it is called mixed basis. Any withdrawal - including a conversion - must be taken proportionally from each category (after the tax year it's contributed, anyway).
So if you have $55,000 in your IRA, of which $5,500 was contributed non-deductible and $49,500 was contributed as deductible or earnings since, you would then need to pay tax on 90% of any Roth conversion - regardless of how much you're converting.
Search terms for this topic are "Isolating IRA Basis", such as this article.
In your case, you likely would have $5500 on line 5, unless you made other nondeductible contributions to your IRA.