Taxable refund confusion

[Gretel]

In general: Is a refundable credit from the state included in the amount that needs to be reported as taxable refund on the 1040?

Scenario: 2007 tax due $50, refundable credit $140, refund paid to TP $90

I believe it is not but could not find anything. The weird thing is that ProSeries includes $90 on pg. 1 of 1040 AND also deducts $50 as state payment on Sch.A.

[Burke]

Whether or not a state tax refund needs to be claimed in the tax year it is received, depends entirely on whether the taxpayer itemized his deductions the previous year, and if he deducted the entire amount of state taxes paid and withheld on the Sche A. If he deducted all of his witholding, then only that amount that exceeds what he could have deducted if he had taken the standard deduction is claimed on this year's tax return. Or, if he deducted sales taxes instead of income taxes (optional), then "0" is claimed on the current year's tax return. Your software should have a worksheet for this. If you understand why this is taxable, it makes more sense -- i.e, you "overdeducted" your income taxes on Sche A if you got a refund. The software is correct in applying the $50 due as a state tax payment this year. It is not likely that he included the refundable credit on his Sche A last year as a deduction.

[Nashville]

State Refundable Credits

...are not that common, although they are becoming more in vogue. This year, even in that bastion of conservatism North Carolina, they have begun state EIC. I can understand why this question was asked.

I would think the "acid test" would be whether the state includes the amount on the 1099-G that they send to the taxpayer.

I'm like Burke - I can't think of any reason why a refundable credit from a state would not be considered an integral part of the state tax refund. It would be taxable to the extent of the benefit it provided on schedule A.

Suppose they will change the worksheet next year to measure the effect of property taxes on the standard deduction...

[Gretel]

Thank you.

So, you actually confirm my thinking, that a refundable credit should not be included in the taxable amount since taxpayer did not benefit from that anyway, right.

[FEDUKE404]

Sch A adjustments for state taxes paid

Be sure you are not getting confused with whether a state refund is taxable as opposed to whether some adjustment on Schedule A for "state taxes paid" is necessary due to a state refund.

Many folks do not realize you cannot automatically claim all state tax payments.just because your refund was not taxed by the feds.

Actually the Intuit (TurboTax) software has a very nice mechanism for automatically adjusting the allowable deduction you can take on Schedule A, such as would occur with a non-taxable state refund that occurred the same calendar year you made a state extension payment.

[Burke]

Thank you.
So, you actually confirm my thinking, that a refundable credit should not be included in the taxable amount since taxpayer did not benefit from that anyway, right.

Yes. If you did not do this T/P in ProSeries last year, that could be the reason it is picking up the $90 on page 1 -- assuming you keyed this info in from 1099G. The states report on 1099G the amount of a refund check issued to the TP. It does not mean it is taxable income. You have to figure that out. TB Worksheet on page 3-22, but there should be one in the software too.

[Gretel]

Burke, I am sure this is an error with the ProSeries software. All info came from my 2007 ProSeries tax return and I have both on as carryover for the 2008 return: a taxable refund AND a deduction for taxes paid. I called ProSeries twice and after spending over an hour and getting nowhere with 2 different people I just gave up.

Whenever the software does something that doesn't make any sense I start to doubt myself and seek confirmation if I finally believe the software is wrong.

[FEDUKE404]

Allocations possible?

Burke, I am sure this is an error with the ProSeries software. All info came from my 2007 ProSeries tax return and I have both on as carryover for the 2008 return: a taxable refund AND a deduction for taxes paid. I called ProSeries twice and after spending over an hour and getting nowhere with 2 different people I just gave up.

Whenever the software does something that doesn't make any sense I start to doubt myself and seek confirmation if I finally believe the software is wrong.

Look at the "State and Local Income Tax Refund Worksheet" Part I, especially columns f and/or g. These calculations relate to allocated estimated/extension payments based upon a state refund, even though none of the refund is taxable. The "refund allocated to tax paid after 12/31/2007" is worth review.

If that does not offer info, look downward to the other stuff related to recovery amounts. You may wish to toggle the "use this worksheet" Y/N to see if anything else changes.

As I mentioned earlier, even WITHOUT any taxable state income tax refund, the amounts of state taxes paid may need to be adjusted for correct entry on Schedule A.

Sadly, I have found it extremely difficult to find anyone at Intuit with knowledge of the subtleties of some tax rules. The front-line people are basically clueless, as you apparently found out. Conversely, I have found that after doing some more digging on my part that their calculations are generally correct, absent operator input errors.

Good luck!!

FE

[Gretel]

Thanks FE. I checked was you suggested. In my case however no estimated payment was made after 12/31. so these allocations don't apply. I still stand by my opinion that it cannot be possible to have a taxable (on non-taxable - it really doesn't matter) refund AND a deduction for state taxes paid with the prior year's tax return at the same time.

ProSeries messed up here and if my state is the only state that had a refundable credit that could cause this scenario then nobody in another state will have this problem.

[Gary]

State refund

A refund from the state if taxes due are less the taxes withheld or paid is not a credit. It is a refund.