State Tax Refund

[Oxtrainer]

On the year after filing a Schedule A using State Sales Tax instead of State Income Tax
the State tax refund may or may not be partially taxable. This is referred to in Pub 525 Page 20and apparently is so simple that I and others have not been able to figure just how this works. Do any of you have a simple explanation of how to figure this. Maybe it
will have to be made Ox simple. Thanks

[S T]

No benefit of a Sales Tax Deduction

TTB page 3-2 has a chart item #10

Isn't it because of,

if t/p uses state taxes paid (such as state withholding and other state income payments) t/p receives a federal tax benefit from that deduction for state taxes paid from one year to the next up and has to include the following year the amount of the refund that they receive from the State that might have contributed to that refund.

T/P receives no state tax refund from sales tax deduction , as most states will not acknowledge the "sales tax deduction", therefore, does not have to be acknowledged on the Federal form.

I probably did not "state" this very well! Maybe someone else can "state" it better!

Sandy

[Oxtrainer]

Sales Tax

Thank you Sandy but I have failed pose the question correctly.

May be this can help> (when the taxpayer deductes state income tax and then in
the following year receive a refund for the state income
tax, the amount of the refund subject to recovery
(taxable) is reduced by the amount they could have
deducted had they chosen to deduct sales tax)

Any way the example we have is a 700 state return of which only 225 is
taxable. I think this is a new thing starting in 2006 ?????
I just don't know how to make the question right let alone the answer.

[S T]

The state Tax refund and Claiming As Income

Under the old rules prior to the claiming of sales tax deduction starting in 2005??, has always been hard for me to explain to my clients. They don't understand why they have to claim their State Tax Refund as income the following year, if they have to claim any portion at all.

So I can understand your dilemna, and I am not the one to try to explain in written messages,

So, hopefully Bees, or significant others on TB will post an answer that is far more eloquent and clear than I am with conveying messages in written text.

Then when that info is posted, I will print and add to my other items of explanation that I can offer my clients.

Sandy

[Corduroy Frog]

Tax the Benefit

I once made a funny remark about Oxtrainer, but the yoke was on me.
So I took it back.

I believe the proper thing to do is to calculate the benefit of the state tax refund.
a) If TP deducted sales taxes instead of state income taxes, then TP did not
benefit. State tax refund is tax-free.
b) If TP elected standard deduction, then TP did not benefit regardless of any
other factors, period. State tax refund is tax-free.
c) If TP deducted the SIT on Sch. A for the year in question, the state tax
refund is taxable, except only to the extent of the amount total itemized
deductions exceeded the standard deduction. This excess is the only
benefit the taxpayer received.

If taxpayer has a narrow difference between choosing to deduct SIT or Sales Tax
on his schedule A, an election to deduct Sales Tax (even if slightly less) will
thus guarantee that he will not be taxed on the SIT refund the following year.

[S T]

See I knew

Cord Frog,
I knew someone like you or the " TB significant others" could post so much more clearly than what I can put in text.

Thanks

Sandy

[Oxtrainer]

State Sales Tax

Thanks Corduroy Frog. The item (c) was the one I was after and the explanation seems
clearer now. And I do mean Thanks

[joanmcq]

State tax refund also may not be taxable if the taxpayer was in AMT and received no tax benefit from the deduction.