Simple Question about State Tax Refunds

[FEDUKE404]

Excellent point!

I had forgotten about the refundable credit scenario for some states.

In the distant past I do recall a (NY?) Form 1099-G with a "reduced" state refund amount shown. Client confirmed he received the originally calculated "big" refund and not the "small" refund shown on the Form 1099-G.

Of course, my software at first was still rattling around the "big" refund for its calculations from the prior year return. Once I figured out what had occured (A minus B), I used the amount shown on the actual Form 1099-G.

Side note: At one point NY - to cut costs - was no longer even mailing Forms 1099-G, although the taxpayer could view the tax document online. Whether they changed that approach is unknown to me.

FE

[JohnH]

I think applying the "Tax Benefit Rule" to state tax refunds will always steer you in the right direction. A refund of state tax in and of itself is not a taxable event - only the part of the refund that produced a tax benefit in the prior year becomes income in the current year.

[dtlee]

John,

What you say is true.

Hence, it is even more important to understand what is and what is not part of the refund.

If the state refundable credits are not considered part of the "refund" then the tax benefit rule does not apply to them since they are not a recovery of a previously deducted amount.

Hence, I believe that is the point that Gary was making about whether the refundable credits are treated as part of the refund or as something else.

I think it is clear that the IRS, at least as far as the documents I mentioned, does not consider refundable credits to be subject to the "tax benefit rule" since they are not part of the refund of taxes paid.

[DonPriebe]

... NY State 1099-Gs are now online and we can now determine conclusively if no 1099-G amount is reportable ...

Glass half-empty version: NY State no longer mails out a 1099-Gs to the taxpayer.

[Roland Slugg]

This post touches on a subject about which I have always thought the IRS's Pub 525 was just plain wrong. That "allocation" it describes makes no sense and runs contrary to normal cash basis accounting.

[dtlee]

Just Wondering

This post touches on a subject about which I have always thought the IRS's Pub 525 was just plain wrong. That "allocation" it describes makes no sense and runs contrary to normal cash basis accounting.

Roland,

What is your perspective on how this should more properly be done.

Would you think the amounts should be allocated first to all payments made during the prior year instead of prorating across the prior and current year?

Thanks.