Do you put a refund on line 10

[JG EA]

and the state taxes paid on schedule A if there are 2 states, one is a refund that was taken on last year's schedule A and one is a balance due? Or do you net them even though this would decrease the AGI percentages for schedule A?

I know there is a calculation for state taxes when estimated taxes are in the picture, but I have not come across an answer for the correct way to do this. I'm sure there is an answer, but I haven't come across it.

[Snaggletooth]

Cannot "net"

JG IRS wants any state tax refund to be shown on Line 10. Reason being state income taxes are not always a deduction due to (1)inability to itemize and (2)erosion of itemized deductions at higher income levels.

It gets worse. Even if the taxpayer chooses to APPLY the refund rather than receiving it, the IRS requires line 10 to show the amount.

I've got a couple very high income people in Alabama, and I've told them to quit paying Alabama estimated taxes, and be SURE they don't have a state refund. Even if Alabama penalizes them, they are much better off than dealing with the effects of the above.

Refunds are refunds, and payments are payments. No "netting"

[JG EA]

Thanks

JG IRS wants any state tax refund to be shown on Line 10. ... No "netting"

Thanks that makes sense. That is the way I've been doing it, but I ran into a little opposition on this.
JG

[RLymanC]

Reportable state tax refund

I watch my clients Sch A amount. If a married couple can itemize in the amount of say $10,500, and there state refund is $800 I point out that they will save $75.00 in IRS taxes this year, but have to pay $120.00 on state refund next year. All choose not to itemize.

[Snaggletooth]

Whoa Lyman C!

Lyman, in your example above, the taxability of the state refund in the following year is limited to the benefit it produced in the year deducted.

If deducting the state income tax creates an excess of only $500 to the itemized deduction thresshold, then the maximum it can be taxed is only $500, even if there is an $800 refund...

[RLymanC]

Snag

I must not have made my scenario very clear.

If you itemize in 2006, then your state refund is taxable on line 10 in 2007.

SOOOO my above example is correct. If you don't itemize the $800 state tax refund you receive in 2007 is not taxable.

[Bill Tubbs]

benefit

I must not have made my scenario very clear.

If you itemize in 2006, then your state refund is taxable on line 10 in 2007.

SOOOO my above example is correct. If you don't itemize the $800 state tax refund you receive in 2007 is not taxable.

That is correct. But also, in your example, if they deduct state income taxes, will get $800 of state income tax refund, and are only $500 over the standard deduction, then only $500 of the state income tax refund is taxable -- not the full $800. The full $800 becomes entirely taxable when their total itemized deductions is more than $800 higher than the standard.

Bill

[OldJack]

I agree with Bill. Taxable only to the benefit received is one of those minor things we tend to forget because we input the total and our software takes care of the calculation.

[Bill Tubbs]

Thanks OldJack

Taxable only to the benefit received [...]

I was trying to remember that terminology, but at 1:19am it just wasn't coming to me.

Bill