This is a different take on an old question. A client has had 4K of state tax withheld on a real estate sale. He will be getting it all back. Letting the 4K flow through to Schedule A will result in a shift of income to 2013, when he has to report the refund. While the instructions tell you that this is the way you should do it, you are also told that you are not supposed to deduct excessive state tax payments that you know will be refunded. What would you do?
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Evan Appelman, EA -
I would probably take the deduction on Sch A and report the refund in 2013 as long as the TP is using Sch A anyway. If he itemizes in 2012 and gets the 1099G in 2013, it might generate a CP notice if the refund were not included in income. -
Two choices
First, the withholding was not optional, the state demanded it. So deducting it should be ok. The IRS does not want people deliberatly paying to much to defer taxes.
Second, if you chosse not to deduct, which to me is allowable, then in 2013 you wil need to show the amount on line 10 and then back it out with a negative amount on line 21 or an entry on Schedule A in the taxes category. However if taxpayer is subject to AMT, then neither of these will work very well.Comment
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Agree
I do believe "excessive" would be appropriately named if a taxpayer were arranging for huge state tax payments in an attempt to shift income. In this case, the withholding is mandatory and this means the taxpayer should be removed from suspicion.
The suggested possibility of not claiming the deduction or the income that would be reportable in the following year has a significant downside. The state has no idea of what the taxpayer is doing and will issue him a 1099-G anyway. The decision not to include the refund as income thus gives rise to a CP-2000 notice. The big problem is how to respond to the CP-2000 and when uncovering the decision by the taxpayer, the IRS may want to investigate further to discover improper shifting of income.Comment
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