state refund Taxable or not (nol)

[ljwalters]

Client had 200K nol last year and a nice state refund because of it. 

AGI ( -102,898 )

 

ATX is taxing her state refund.  Same refund with or without Sch A.  So I don't think it should be taxable.

 

How do I get it off the return.

 

FYI did Sch A to hold charity over to this year.  That did work.

[mcb39]

It is taxable IF it was used as an itemized deduction in the prior year.

[kcjenkins]

Should have left it off last year's A if it made no change in tax liability last yr.  But did you do the Line 19 worksheet?

[ljwalters]

^{The NOL was in 2013 the worksheet lets you take it off for AMT purposes.}

^{but I don't see where to take it off due to the NOL}

^{If I didn't do the A last year the charity and mortgage interest credit would have been lost instead of carried forward.}

[Lion EA]

I sometimes take sales tax instead of income tax if over two years it will benefit the client.  But, the worksheet should work through whether or not last year's deduction benefited the client over and above the sales tax and over and above the standard deduction and how much is income this year.

[jklcpa]

See pub 525 concerning recoveries of amounts included in itemized deductions in a prior year.  Maybe this part will help you:

 

Negative taxable income.   If your taxable income for the prior year ( Worksheet 2 , line 10) was a negative amount, the recovery you must include in income is reduced by that amount. You have a negative taxable income for 2013 if your:

• Form 1040, line 42 was more than line 41,

• Form 1040NR, line 40 was more than line 39, or

• Form 1040NR-EZ, line 13 was more than line 12.

 

At the bottom of Worksheet 2 linked to above, in reference to entering taxable income for the prior year it states:  ⁴ If taxable income is a negative amount, enter that amount in brackets. Do not enter zero unless your taxable income is exactly zero. See Negative taxable income . Taxable income will have to be adjusted for any net operating loss carryover. For more information, see Publication 536, Net Operating Losses for Individuals, Estates, and Trusts.

 

 

The NOL was created in 2013 and wasn't from a carryforward from a previous year. Because you say that the tax didn't change with or without the Schedule A, there is no tax benefit to the state tax being included in the Sch A and therefore the state refund shouldn't be taxed.  I'd just delete the entry from the return and move on.

 

Is this question coming up because ATX included the state refund when you rolled the data forward, or did your client actually receive a 1099G for the refund?

[mcb39]

WI is no longer sending out 1099G unless you ask for it.  It is just a known that if you deducted it in the prior year, you have to include it in income in the current year.  ATX recognizes this.  Even if it is populated on the Sch A and itemized deductions are not used; ATX recognizes that and does not include the WI prior year refund in the income.   It appears to me that it got included automatically when the W2 forms were filled in and was used along with the charity and mortgage income.   This is nothing new.

[jklcpa]

Marilyn, I know that's how ATX works, and so do many other tax programs, including the one I'm now using.  I was asking the OP since she's concerned about it being taxable or not, and how to get rid of the refund off the return.

 

The refund isn't taxable since the income on the return was negative, and even the AGI was negative, so the OP should simply delete the entry from the input screens.   Really, I was anticipating her next question of "will that generate a notice if the client received a 1099G?" and that is why I put that in there.

[Abby Normal]

If there was no 'tax benefit' it is not taxable. Override the taxable refund worksheet. I do this all the time in AMT situations and zero prior year tax situations.

 

Go back to the prior year return and reduce the state taxes claimed by the amount of the refund. If the tax liability does not change, the refund is not taxable.

[ljwalters]

Thanks Jklcpa. 

Yes she received a 1099 G but that does not make it taxable.

[TAXMAN]

I have seen this year a lot of the 1099-g(tax refunds) go from 0 to the full amount. Just have to work thru the prior year deduction to see.