State tax refund taxability after SALT cap

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slalom
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Joined: Mon Dec 25, 2017 4:59 am

State tax refund taxability after SALT cap

Post by slalom » Thu Jan 04, 2018 5:52 pm

I'm looking ahead to the 2018 tax year -

For those of us who will itemize and be over the SALT cap, it seems to me that they will have to figure out a method for some of your state tax refund to no longer be taxed.

For example, if you pay $12,000 in state income tax and $7,000 in property taxes - how much of the state tax refund is taxable should depend on how much of your state income tax is included under the cap. If you consider the cap to be fulfilled by $7,000 property + $3,000 state income tax, then 75% of your state income tax paid was not a deduction - so would you only pay taxes on 25% of whatever the refund was? At $10,000 of the $12k in state income tax and no property tax, the amount would be different.

My brain is breaking a little thinking about this, but it seems like the parts of the tax forms related to this will need to be changed in some way.

Thesaints
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Re: State tax refund taxability after SALT cap

Post by Thesaints » Thu Jan 04, 2018 5:56 pm

Isn't this already the case ?
State refunds are taxed only insofar the itemized deduction exceeds the standard one.

jebmke
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Re: State tax refund taxability after SALT cap

Post by jebmke » Thu Jan 04, 2018 5:56 pm

slalom wrote:
Thu Jan 04, 2018 5:52 pm
I'm looking ahead to the 2018 tax year -

For those of us who will itemize and be over the SALT cap, it seems to me that they will have to figure out a method for some of your state tax refund to no longer be taxed.

For example, if you pay $12,000 in state income tax and $7,000 in property taxes - how much of the state tax refund is taxable should depend on how much of your state income tax is included under the cap. If you consider the cap to be fulfilled by $7,000 property + $3,000 state income tax, then 75% of your state income tax paid was not a deduction - so would you only pay taxes on 25% of whatever the refund was? At $10,000 of the $12k in state income tax and no property tax, the amount would be different.

My brain is breaking a little thinking about this, but it seems like the parts of the tax forms related to this will need to be changed in some way.
This is true even under the old rules. Sometimes some or all of the state tax refund is not taxable even if you include it on Schedule A. There are guidelines in various IRS publications on how to determine the taxable amount. I'm sure those will be updated eventually.

The updating of IRS pubs will be substantial. Yet another reason to delay filing until the last possible minute (October, 2019).
When you discover that you are riding a dead horse, the best strategy is to dismount.

slalom
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Joined: Mon Dec 25, 2017 4:59 am

Re: State tax refund taxability after SALT cap

Post by slalom » Thu Jan 04, 2018 5:59 pm

Thanks for the replies, I wasn't aware of how exactly it worked and was incorrect in my assumption.

kaneohe
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Re: State tax refund taxability after SALT cap

Post by kaneohe » Thu Jan 04, 2018 6:48 pm


ivk5
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Re: State tax refund taxability after SALT cap

Post by ivk5 » Thu Jan 04, 2018 7:23 pm

SALT refund only taxable to the extent you received an actual tax benefit by deducting the payment previously.

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FIREchief
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Re: State tax refund taxability after SALT cap

Post by FIREchief » Thu Jan 04, 2018 7:26 pm

It is highly likely that your state income tax refund of $XYZ received for tax years 2018 and beyond will only be taxable to the extent that your final $XYZ paid to the state in that tax year reduced your federal taxable income.

In the OPs example, only the amount of a state refund in excess of $9000 should be taxable. This is pretty standard practice for the IRS on a number of items.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

Alan S.
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Re: State tax refund taxability after SALT cap

Post by Alan S. » Thu Jan 04, 2018 7:38 pm

The question is a good one.

Prior to 2018, the Inst for Sch A includes this directive regarding deduction of SIT:
Don't reduce your deduction by any: State or local income tax refund or credit you expect to receive for 2016
So you did not have the option of not deducting the amount you knew you were getting a refund of. You had to deduct what you paid and then deal with how much of the refund you had to include in income the following year, a calculation that was made more complex with the advent of the choice of deducting sales taxes instead of income taxes.

Now, fast forward to 2018 in which Sch A will need considerable revisions.

If you could pick and choose how to fill up the 10,000 limit, you would first list all your property taxes paid, then list SIT stopping once the aggregate hit 10k. That way, a refund of SIT would be much less likely to be included in income the following year. In fact, if sales taxes paid was enough to bring the total to 10k, why not just check the sales tax box and eliminate any chance of a SIT refund being taxable?

But if the above quoted directive is retained, you will not be able to do that. So the question now is what conditions will be added by the IRS with respect to how Sch A must be completed with respect to everything subject to the 10k cap.

Then go ahead and send in you return on a postcard! :twisted:

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