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    Sch A state tax

    In Jan 2016 TP made a state 2015 estimated payment of 35K. So, in 2015 it was not taken as an itemized deduction, but was taken as a credit on state return.

    2015 state return had a refund of 24K, which is being claimed as income on 2016 1040.

    For 2016 Sch A, Pro is deducting both the 35K cash payment and the 24K taxable refund.

    I'm not wrapping my head around why the 24K refund is showing as a deduction? Pro is generally correct, and I probably just have my mind set one way and am missing something obvious.

    Can someone help me understand if/how this is correct?

    Thanks.

    #2
    Was the 2015 overpayment applied toward the 2016's estimate?
    Uncle Sam, CPA, EA. ARA, NTPI Fellow

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      #3
      Originally posted by Uncle Sam View Post
      Was the 2015 overpayment applied toward the 2016's estimate?
      Yes it was.

      Comment


        #4
        Refund may have been applied to estimated tax

        Originally posted by kathyc2 View Post
        In Jan 2016 TP made a state 2015 estimated payment of 35K. So, in 2015 it was not taken as an itemized deduction, but was taken as a credit on state return.

        2015 state return had a refund of 24K, which is being claimed as income on 2016 1040.

        For 2016 Sch A, Pro is deducting both the 35K cash payment and the 24K taxable refund.

        I'm not wrapping my head around why the 24K refund is showing as a deduction? Pro is generally correct, and I probably just have my mind set one way and am missing something obvious.

        Can someone help me understand if/how this is correct?

        Thanks.
        What do you mean by "taken as a credit on state return"? I assume you mean that amount was deemed a payment against the state income taxes?

        The 2016 payment for 2015 state taxes is obviously a potential 2016 Schedule A deduction.
        There is no way the 2016 24k taxable refund can (also) become a 2016 Schedule A deduction, UNLESS that amount was applied to the next year state estimated payments.

        Things can get really messy if you have state refunds and estimated payments in the same calendar year. Most tax software has an optional (worksheet supported) method to "adjust" the taxable amount of any refund shown on Form 1040 as it relates to other state income tax activity during the same calendar year.

        In the simplest of situations, you show the full refund on the Form 1040 and the full payments on Schedule A. That approach is easier to follow as "logical." But it is often to the taxpayer's benefit to use the worksheet and show a taxable state refund smaller than what was shown on any Form 1099-G, in addition to a deduction for state taxes on Schedule A smaller than the real amounts "paid." In many instances, the overall +/- amounts offset each other regardless of the method used. But in some instances it is possible to show a smaller taxable refund which can have a potential impact on AGI-related issues, such as taxable amount of Soc Sec, allowable medical deductions, NIIT, etc. On the flip side, if the client does not have enough deductions to itemize, the higher deduction on Schedule A is simply wasted.

        It sounds as it your entries are NOT using the optional method. It might help.
        As to how the 24k refund is also appearing as a deduction. . .I have no idea.

        Suggest possible use of Q&A option for your refund/payments, and also do a careful review of what was actually done with the 24k "refund." If the client did not receive a check or a direct deposit for that refund amount, you may have the answer to your questions.

        FE

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          #5
          Yes, it was applied to 2016. I get it now. The applied refund was the same thing as a cash payment. Duh, with help here the light bulb above my head turned on! Thanks!

          Comment


            #6
            Overpayments are Refunds

            I remember the day where to be taxable, a taxpayer would actually have to RECEIVE a state tax refund. I had taxpayers refusing refunds and applying them to their succeeding year estimated payments.

            At some point, this changed. The language now states "refunds, overpayments, offsets, etc." and the IRS began taxing overpayments whether they were received or not. The overpayment not taken, however, becomes basis for the succeeding year's Sch A state income tax deduction.

            The taxpayer is better off with less AGI and less Sch A deductions.

            Comment


              #7
              A "received" state refund ??

              Originally posted by Snaggletooth View Post
              I remember the day where to be taxable, a taxpayer would actually have to RECEIVE a state tax refund. I had taxpayers refusing refunds and applying them to their succeeding year estimated payments.

              At some point, this changed. The language now states "refunds, overpayments, offsets, etc." and the IRS began taxing overpayments whether they were received or not. The overpayment not taken, however, becomes basis for the succeeding year's Sch A state income tax deduction.

              The taxpayer is better off with less AGI and less Sch A deductions.
              I sure don't remember that scenario.

              You were deemed to have "received" a state refund once it was rightfully ("constructively" ?) yours. Whether you got a check, or a direct deposit, or a rollover to the next year's state estimated taxes did not in any way alter the "receipt" concept and any inherent taxation of the state refund. (I'm sure Forms 1099-G were also issued for each of the above scenarios?)

              ( Kinda reminds me of folks who thought they could defer wage income by not cashing a December paycheck until sometime in the following January. )

              What I do recall from the dusty time vault were the two yes/no questions asked by H&R Block. 1 - Did you receive a state refund? and 2 - Did you itemize last year? If both were affirmative, the state refund was shown as fully taxable on the front page of the Form 1040. End of tale. Computer software and a better awareness of the options of dealing with a state refund have hopefully reduced that prior simplistic approach to the taxation of state refunds.

              I do agree that, in cases where there can be a difference in tax, your last comment is generally correct.

              FE

              Comment


                #8
                You may want to check Publication 525

                There may be something wrong in the reporting of the entire refund as taxable, though it is possible that the net result may be right. When an estimated tax payment (or an amount paid with an extension) and the refund of taxes are made in the same year, part of the refund could be considered attributable to the amount paid in 2015 if any estimates or withholding were made in that year and this part would be considered a taxable refund of previously deducted amount.

                The amount paid in 2016 and refunded in 2016 would not be treated as income and a deduction according to the publication. ProSeries did do this somewhat correctly the last time I tested this. Did they break this or is the "Pro" you referenced a different product.
                Doug

                Comment


                  #9
                  I concur

                  Originally posted by dtlee View Post
                  There may be something wrong in the reporting of the entire refund as taxable, though it is possible that the net result may be right. When an estimated tax payment (or an amount paid with an extension) and the refund of taxes are made in the same year, part of the refund could be considered attributable to the amount paid in 2015 if any estimates or withholding were made in that year and this part would be considered a taxable refund of previously deducted amount.

                  The amount paid in 2016 and refunded in 2016 would not be treated as income and a deduction according to the publication. ProSeries did do this somewhat correctly the last time I tested this. Did they break this or is the "Pro" you referenced a different product.
                  I believe this alternative treatment is what I had already referenced in the 4th paragraph of my 11/16/2017 comment upthread ??

                  FE

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