State tax refund

[GeorgeM]

I have a client who had a state tax refund of $1,787 for 2006.

ATX brought it in correctly on a 1099G.

Problem being that when it entered it on the 1040 it only entered $1,097.

Can any one explain this?

[Evan S. Golar]

It's conceivable that the client, although the full state tax refund was received, didn't obtain the full tax benefit from it, depending upon the other itemized deductions.

Your software program should be able to produce a worksheet schedule providng that computation.

Simply because a refund was received, doesn't automatically it's all fully taxable.

[Teri2414]

Look at the 'State Tax Refund' tab on the 1040. The worksheet will have all the info there.

[JohnH]

One way to do a quick assessment on this is to take a look at last year's itemized deductions and determine if they were just slightly greater than the standard deduction - high enough to make it worthwhile to itemize, but not high enough to produce a complete tax benefit from the state income tax deduction . I'm glad the software does this calculation for us.

[Tax Prep by Deb]

Also the program calculate the difference between the sales tax deduction and the state refund. The only part of the state refund that is taxable is the amount over what they could have claimed had they taken the sales tax deduction instead.

I was over riding this last year until I looked closely at the instructions and found that I had erred.

Deb!

[lbbwest]

Also the program calculate the difference between the sales tax deduction and the state refund. The only part of the state refund that is taxable is the amount over what they could have claimed had they taken the sales tax deduction instead.

I was over riding this last year until I looked closely at the instructions and found that I had erred.

Deb!

That doesn't sound correct. If taxpayers are allowed EITHER Standard Deduction or Itemized Deduction AND taxpayers can choose EITHER state sales tax or state income tax as part of their itemized deductions; AND taxpayers only have to report as income the amount of their state income tax refund that contributed on a pro-rata basis to the itemizations in excess of the standard; WHY would they only have the claim the difference between the sales tax deduction? The sales tax deduction CAN BE an actual number instead of derived from the chart...AND it has to contribute to the excess of itemizations over the standard.

Not the brightest bulb in the box doesn't get it. Please explain. lbb

[lbbwest]

That doesn't sound correct. If taxpayers are allowed EITHER Standard Deduction or Itemized Deduction AND taxpayers can choose EITHER state sales tax or state income tax as part of their itemized deductions; AND taxpayers only have to report as income the amount of their state income tax refund that contributed on a pro-rata basis to the itemizations in excess of the standard; WHY would they only have the claim the difference between the sales tax deduction? The sales tax deduction CAN BE an actual number instead of derived from the chart...AND it has to contribute to the excess of itemizations over the standard.

Not the brightest bulb in the box doesn't get it. Please explain. lbb

I think I got it. IF they had taken the state sales tax deduction then their state refund would have nothing to do with their Schedule A from the previous year. Thank you for making me think that through.

I told you I wasn't the brightest bulb in the box. lbb

[Burke]

I think I got it. IF they had taken the state sales tax deduction then their state refund would have nothing to do with their Schedule A from the previous year. Thank you for making me think that through.

I told you I wasn't the brightest bulb in the box. lbb

I think you were right the first time. If you take sales tax, nothing to report the next year. If you take state taxes, then excess of refund over ID's is taxable. I never heard of "taking the difference."

[Burke]

I think I got it. IF they had taken the state sales tax deduction then their state refund would have nothing to do with their Schedule A from the previous year. Thank you for making me think that through.

I told you I wasn't the brightest bulb in the box. lbb

I think you were right the first time. If you take sales tax, nothing to report the next year. If you take state taxes, then excess of refund over the standard deduction amount is taxable. I never heard of "taking the difference" between the sales tax amount and the state income tax amount. If that were the case, then everybody's taxable refund would be different from the actual amount received.

[michaelmars]

first check the obvious, did the 2006 return show a refund due of the ck amount or the atx amount, perhaps the state adjusted the refund due to a return error or additional withholding not entered into atx. atx only knows what the 2006 return showed.

[mcb39]

Often, if the itemized deductions are not much more than the standard deduction, you do not have to claim the entire state tax refund in the following year. Someone above was correct when they told you to "jump to" the worksheet for line 10. It is definitely NOT the difference between the state tax and the sales tax.

[JohnH]

I'm guessing the original question related to a MFJ return with total itemized deductions of about $11,000.

(Or a Single with $5,850 or a HOH with $8,250).

[fredazcpa]

look at pub 525, you take out the sales tax (you could have deducted) from the refund and report the differance as per example in pub 525 page 20 and 21 and 1040 instructions for line 10

[Tax Prep by Deb]

look at pub 525, you take out the sales tax (you could have deducted) from the refund and report the differance as per example in pub 525 page 20 and 21 and 1040 instructions for line 10

Thank you fredazcpa. You explained it the way I was trying to. I can see it clearly in my head but sometimes things get lost in the translation between head and mouth or in this case fingers. What you explained is exactly what I was trying to explain, however you did a much clearer job of it!

Deb!

[Burke]

look at pub 525, you take out the sales tax (you could have deducted) from the refund and report the differance as per example in pub 525 page 20 and 21 and 1040 instructions for line 10

It's not quite that simple. If your state refund is MORE than your previous year's state and local income tax DEDUCTION on Schedual A less the sales tax ded you could have taken, then you adjust the reportable taxable refund. This would not apply to everyone who itemized and got a state tax refund.