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**JG EA** · 05-31-2011, 01:26 PM

I feel this is a complex situation that software may not be able to handle. I always do worksheets if this sort of situation arises.

First: I do the standard worksheet (as in TTB) but I've written out my own to compare the state income tax taken on the previous year's return minus the sales taxes the client could have taken. This is if I feel the need in normal situations and I do it anyway in unusual situations. Although I have come to rely on my software to do this this step in normal situations and it does it very well.

Second: If there is any state taxes paid in different years I do a work sheet that I devised based on the information in Pub 525 page 22, 23.

I have a client that always does his taxes on Turbo Tax first and I am usually extremely close to that answer. However, the deficiency of Turbo Tax (and probably every software) is not to include a recovery of state tax if an amended return was done in a year previous to the last tax year. Or even in the last tax year. I can’t see how a program could do this.

I really think this is an area that maybe we should do and not leave it to a programmer’s ability to include all the possible scenarios.

If you haven't gotten a million answers by tomorrow - I will bring my worksheet home and try it out on your scenario.
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Although I just read John's comment about his software doing this calculation correctly if all the correct dates are put into the software, so maybe I'm expecting too little of my software?.

**JohnH** · 05-31-2011, 01:53 PM

--> Although I just read John's comment about his software doing this calculation correctly if all the correct dates are put into the software, so maybe I'm expecting too little of my software? <---

Don't rule out any possibilities here:

1) ATX may be as good as I say it is in this respect;

or

1) I may not know enough to recognize when it's doing it incorrectly.

**dtlee** · 05-31-2011, 02:03 PM

Originally posted by JG EA View Post

I feel this is a complex situation that software may not be able to handle. I always do worksheets if this sort of situation arises.

You may be right that this is too complex to expect them to handle.

However, if I am correct in how this should work, ProSeries got it right and Drake and TaxWorks got really close except they guessed the 1099-G amount wrong (which is critical for this computation to work). In other words, I think they got the more "complex" stuff right.

Please note that four of these packages would have gotten the Line 10 amount wrong without having any state estimates paid in the following year.* That may also be too complex to assume our software can handle.

*As an aside, I am thinking that this miscalculation of Line 10 would indicate that these packages would make the same wrong assumptions when computing the carried forward balance due and thus also incorrectly compute the normal amount of the balance paid to the state which should be deducted on Schedule A.

**dtlee** · 05-31-2011, 02:07 PM

Originally posted by JohnH View Post

--> Although I just read John's comment about his software doing this calculation correctly if all the correct dates are put into the software, so maybe I'm expecting too little of my software? <---

Don't rule out any possibilities here:

1) ATX may be as good as I say it is in this respect;

or

1) I may not know enough to recognize when it's doing it incorrectly.

If you have time and have the 2009/2010 software, could you show us what you think ATX would compute in this situation?

**JohnH** · 05-31-2011, 09:59 PM

Kinda busy these next few days, but I'll try to give it a run-through when I can.

**dtlee** · 06-01-2011, 08:56 AM

Thank you

No rush. I appreciate any time you would be willing to donate to share your findings.

It is quite possible that I was wrong to expect that any software should be able to get something like this right unless the state tax return is unpolluted by use tax, contributions, or refundable credits. I just don't see how those additional items make the calculation liability minus payments so difficult. Perhaps it is harder on other state returns, but there are two liability totals on the New York State Return (state and city) and four lines with payments (withholding for state, New York City, & Yonkers, and estimate/extension payments).

Just for clarification, if I took out the huge complexity of having one estimated tax payment made in January, here is what these would have been reported in 2010 on Line 10:

If the full amount of $5,000 in state taxes withheld and estimated were all paid/withheld in 2009:

Hand Calculation: 519
Drake: 849
TaxWare: 706
TaxWorks: 475
ProSeries: 519
TaxSlayer: 475

Likewise, had there been only the $3,000 state withholding paid in 2009 and there were no estimates, here is what would have been carried to Schedule A, Line 5 by these packages:

Hand Calculation: 1,481
Drake: 1,151
TaxWare: 1,294
TaxWorks: 1,525
ProSeries: 1,481
TaxSlayer: 1,525

I honestly think it is a proration calculation like that one January payment requires is something which we SHOULD be able to trust our software with (in keeping with the other thread on what we check and what we trust). This started out as merely a test to see which product do that computation (Drake, TaxWorks, and ProSeries) and which do not (TaxWare and TaxSlayer Pro). I did not expect to find the diversity of results I got in computing liability minus payments.

**FEDUKE404** · 06-01-2011, 02:39 PM

Worth noting

You should remember that if you have a situation where a taxable state refund occurs, and in the same calendar year the taxpayer PAID state estimated payments, or a state balance due, or a state extension payment, then things can quickly get complicated.

It is not usual for a reduced taxable amount of state refund to appear on Form 1040.

But merely "adding up" what was paid, via the above, and blindly putting that number on Sch A may also not be correct. This is especially true when you modify (reduce?) the taxable amount shown on Form 1040, so that you also may need to likewise adjust the "payments."

Sadly, some preparers I've known take the easy way out re the state refund: It's either completely taxable or its not taxable at all. And in a similar line, then figure out what was "paid" and just place that on the appropriate line of Sch A. In reality, frequently neither approach is correct. The word "allocate" can rear its ugly head.....

Some folks need a lower AGI, and some folks can use a greater itemized deduction.

Others here have noted that software may treat the state refund/state payments differently for a "returning" client (i.e. all prior year info is rattling around) from a "new" client where, for whatever reasons, some relevant information may not yet be available. This would include what the relevant sales tax tables "would" have allowed for the prior year.

While this issue does not quite rise to the level of GIGO, I do think that without a full/complete data entry it is not in the best of interests to compare the "answers" given by various software products.

FE

**dtlee** · 06-01-2011, 03:00 PM

FE,

I was hoping you would respond because I have the sense that you are familiar with these scenarios from your other posts.

I thought I did that properly in the original example with the one estimated payment that was made in the 2010 tax year. Are you saying that my computation and the one by ProSeries were also wrong?

What is the right answer in the scenario I gave in the original post? I may be blaming the wrong software for getting it wrong.

**FEDUKE404** · 06-01-2011, 03:34 PM

ALLOCATION perhaps?

Originally posted by dtlee View Post

FE,

I was hoping you would respond because I have the sense that you are familiar with these scenarios from your other posts.

I thought I did that properly in the original example with the one estimated payment that was made in the 2010 tax year. Are you saying that my computation and the one by ProSeries were also wrong?

What is the right answer in the scenario I gave in the original post? I may be blaming the wrong software for getting it wrong.

There may not necessarily be any "wrong" answer....

IIRC, the TTax ProSeries has a pretty good worksheet (with associated prior year + potential GIGO issues) for determining the taxable state refund. That worksheet also has a use it/DON'T use it option box. Take a look there. I think it may also adjust the Sch A entries??

Pay particular attention to the amounts shown in Part I of the "St Refund Wks" Depending on the relevant facts, there may be entries in the allocated amounts of the refund as reflected in columns c, d, f, g.

It takes somewhat of a perfect storm for these allocations to come into play, but they can.

Sadly, right now I don't have the free time to crunch any numbers with your example. I would suggest perhaps you resort to an "interview" option for entering the state refund and associated questions. That might clear things up. I've found TT pretty good at dealing with such situations. Other software.....well, it takes a bit of elbow grease.... If I should get a chance, I may take a look at the example you gave.

One other caveat: From the very few NY returns I've done (including some amended ones to correct the errors of others!) I've noted there can easily be some (data entry) confusion re the NY disability(?) stuff that shows on a W2 and may/may not make it to Sch A. Whatever the correct answer is to that, you might want to be sure that is not being entered into the equation.

I'll check in later.

FE

**dtlee** · 06-01-2011, 03:50 PM

Thanks

I've used publication 525 to come up with my own worksheets. I think I have it correct, but I cannot say for sure. It does agree (in theory) with what is produced by TaxWorks, Drake, and ProSeries.

The major problem with these three products is that they disagree on what is actually a refund of taxes paid. I base my perspective on Publication 525 and a few other sources. ProSeries agrees with me. I do not think the other four have their computations correct.

**Gary2** · 06-03-2011, 07:15 AM

A tangent on taxability of refundable state tax credits

I haven't sat down to do the NY tax calculation based on the info here, but I'm assuming that part of the issue is that there's a refundable state tax credit that you believe should not be treated as part of the refund that's potentially taxable on the federal.

That certainly makes sense for credits such as state EIC or senior citizen circuit breaker credits, both of which are needs-based, and could be considered a form of state welfare (which isn't taxable). On the other hand, Massachusetts also has refundable credits for motion picture production and dairy farms, and I'm sure other states have their own refundable business credits. It's less obvious whether such business related credits are or are not considered taxable income on the federal return. I think Pub. 525 only references the 1099-G, and doesn't discuss whether any portion of the state tax refund check would be non-taxable for reasons such as this.

So my question is whether there's any IRS documentation or citation at all that discusses this issue? Are the 1099-Gs issued by the states considered reliable? (I hope that most preparers would give the physical 1099-G preference over the amount calculated by their program from the previous year, unless they had a specific reason and citation as to why the 1099-G was wrong.)

**dtlee** · 06-03-2011, 08:48 AM

Originally posted by Gary2 View Post

I haven't sat down to do the NY tax calculation based on the info here, but I'm assuming that part of the issue is that there's a refundable state tax credit that you believe should not be treated as part of the refund that's potentially taxable on the federal.

That certainly makes sense for credits such as state EIC or senior citizen circuit breaker credits, both of which are needs-based, and could be considered a form of state welfare (which isn't taxable). On the other hand, Massachusetts also has refundable credits for motion picture production and dairy farms, and I'm sure other states have their own refundable business credits. It's less obvious whether such business related credits are or are not considered taxable income on the federal return. I think Pub. 525 only references the 1099-G, and doesn't discuss whether any portion of the state tax refund check would be non-taxable for reasons such as this.

So my question is whether there's any IRS documentation or citation at all that discusses this issue? Are the 1099-Gs issued by the states considered reliable? (I hope that most preparers would give the physical 1099-G preference over the amount calculated by their program from the previous year, unless they had a specific reason and citation as to why the 1099-G was wrong.)

I have posted here and other places asking anyone for a cite saying that any state refundable credits are nontaxable to taxpayers. I believe that in some situations these actually may constitute taxable payments but not payments taxable as state tax refunds.

Here is an Advisory Opinion that is somewhat less useful because it does not identify the credit or state that is involved, but gives some raationale as to how this author interprets state refundable credits (My interpretation is that they are saying that if you cannot consider them gifts and they are paid without regard to whether any taxes were paid (which describes the refundable credits I know including State EIC payments) they are taxable [and also reportable by the state under more general rules if over $600] but not tax refunds [reported on 1099-G].).

http://www.irs.gov/pub/irs-lafa/060901f.pdf

Of course, this document cannot be cited or used as precedent, but it is interesting reading.

I am not trying to say I expect my software to interpret the taxability in general of refundable credits. That interpretation should be the job of the preparer. I doubt even the much vaunted Lacerte decides what to do with state refundable credits (other than not including them as part of the taxable refund).

However, I expect my software (any software) to limit the amount on Line 10 (which is excluded from AMT computations) to the amount of state taxes refunded.

**dtlee** · 06-03-2011, 08:56 AM

Originally posted by Gary2 View Post

(I hope that most preparers would give the physical 1099-G preference over the amount calculated by their program from the previous year, unless they had a specific reason and citation as to why the 1099-G was wrong.)

The only issue here is that when the state claims that the 1099-G amount is zero (NY State 1099-Gs are now online and we can now determine conclusively if no 1099-G amount is reportable) but your software says there is an amount to be included on line 10, it is completely possible that you instead have an amount deductible on Schedule A, Line 5 instead.

For example...

In Drake, if the liability is $1,000 and the payments are $800 with a $330 refundable credit, Drake will likely carry forward $130 to line 10. New York State will not issue a 1099-G in that situation and the preparer probably should deduct $200 on Schedule A, Line 5.

Again, I am not going to dictate what should be done with the other $330, but it appears that there is a lot of evidence that this refundable credit could be taxable to not just taxpayers who pay taxes and not just taxpayers who itemize deductions.

Like I said, I have never found a citation saying that any refundable credits from a state government is considered nontaxable income to the recipient. (As an aside, if it is nontaxable, we also should be including it as an addition to AGI along for calculating the Sales Tax Deduction as we probably are doing wiith the nontaxable federal refundable credits).

**dtlee** · 06-03-2011, 09:10 AM

Letter Ruling 8445062

You may also want to look at Letter Ruling 8445062 from August 9, 1984....

I have included part of it below:

In the instant case, refundable A and B Credits are allowable in addition to any State income tax refund or credit otherwise allowable. However, the credits themselves do not constitute overpayments of tax; rather, they are allowable as credits or are refundable whether or not there has been any State income tax paid. Consequently, only refunds representing the excess of State income tax withheld or paid over the amount of the actual state income tax liability are reportable under section 6050E.

Accordingly, based on the above cited law and rationale, the following answers are provided in reply to your specific questions. Also, there is attached and made part of this ruling letter a copy of Form 1099-G for 1984.

How is the year (Box 3) on Form 1099-G to be determined?

The year designation to be entered in Box 3 is the taxable year for which the refund was made. As indicated in the instructions for Form 1099-G, if no entry is made in Box 3, the refund will be considered to be the refund for the taxable year 1983.
How is the refund (Box 2) on Form 1099-G to be determined?
In general--
The amount of the refund to be reported in Box 2 does not include any State A Credit or any State B Credit. It does, however, include any amount designated as a donation to the C Fund.

Basically, this says if to figure the refund without regard to the refundable credits or the donations to charities. Thus, if a taxpayer had a liability of $700, payments of $800, a refundable credit of $330 and a gift to wildlife of $50, you would ignore the refundable credit and the gift to wildlife. In that scenario, the 1099-G amount would be $100 even though the actual refund is $380.

($380 minus $330 plus $50 doing it the hard way or $800 minus $700 doing it the easy way).

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