State income tax refund - Claimed if not received?

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oaks
Posts: 50
Joined: Wed Jan 31, 2018 11:47 am

State income tax refund - Claimed if not received?

Post by oaks » Fri Sep 28, 2018 1:05 pm

Does anyone know if you APPLY your 2017 state income tax refund toward your 2018 state estimated tax payment if you still receive one of those 1098-G forms about the refund and have to claim it as income in 2018?

Or no matter what, whether you receive the check or apply toward the next state tax year you will have to claim the income on federal/state/etc in the next year?

jebmke
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Re: State income tax refund - Claimed if not received?

Post by jebmke » Fri Sep 28, 2018 1:07 pm

Does not matter if you actually received money. If you get a refund, you need to sort out whether it is taxable and has to be reported. Some states are not consistently sending out the forms so whether you got one or not has no bearing on whether the refund is taxable income.
When you discover that you are riding a dead horse, the best strategy is to dismount.

senex
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Re: State income tax refund - Claimed if not received?

Post by senex » Fri Sep 28, 2018 1:26 pm

What you did with the refund is irrelevant -- just like a 1099-DIV is taxable whether you reinvested the dividends or received cash.

The 1099-G income is federally taxable if you itemized federal deductions in the tax year that produced the state refund. If you didn't itemize, I'm not sure if you report it and then subtract it out vs. never report it (the 1040 instructions or TurboTax will tell you the right thing to do). It is not taxable by your state; their forms will subtract it out if you add it to federal agi.

The reason for the whole mess is the circular dependency between federal and state taxes (fed tax due depends on state tax due, AND state tax due depends on federal tax due). For better or worse, they break the dependency by having the feds *pretend* you paid a certain amount of state tax (the amount of your withholding). If it turns out you paid less than that (i.e. you got a refund), then the fed's pretending was too aggressive, and they gave you a bigger deduction (if you itemized) than you deserved. They correct it by adding the delta to this year's taxes. It isn't perfect (because your tax bracket could have changed, etc), but it's a reasonably simple way to break the circular dependency.

jebmke
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Re: State income tax refund - Claimed if not received?

Post by jebmke » Fri Sep 28, 2018 1:36 pm

senex wrote:
Fri Sep 28, 2018 1:26 pm
The 1099-G income is federally taxable if you itemized federal deductions in the tax year that produced the state refund.
It may or may not be taxable depending on whether you got any benefit from the deduction. There are some somewhat convoluted calculations one can make to determine how much of the refund, if any, is reportable on the 1040. In some cases it may be entirely or partially not reportable income. Just because one itemized, does not necessarily make it reportable income.
When you discover that you are riding a dead horse, the best strategy is to dismount.

123
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Re: State income tax refund - Claimed if not received?

Post by 123 » Fri Sep 28, 2018 2:12 pm

A problem with applying income tax refunds to current year estimated taxes is that if there is a subsequent tax error (i.e. missed 1099 etc) it is possible that the tax payment issue will cascade through multiple years (since a smaller refund could cause an underpayment in a subseqent year). We always process and pay each tax year independently to avoid this problem.
The closest helping hand is at the end of your own arm.

senex
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Re: State income tax refund - Claimed if not received?

Post by senex » Fri Sep 28, 2018 2:44 pm

jebmke wrote:
Fri Sep 28, 2018 1:36 pm
It may or may not be taxable depending on whether you got any benefit from the deduction. There are some somewhat convoluted calculations...
I believe the principle of what you're saying -- that it will be taxable this year if you got a federal benefit related to state taxes last year, and not if you didn't.

For my personal edification, do you know an example of how you could itemize but get no benefit?

My understanding is that Sched A has a line item for state taxes, which gets included in the Sched A sum, possibly massaged a bit (but never zeroed), then copied back to your 1040, thus reducing your taxable income. Oh, is your case the case in which you itemize deductions but have no taxable income?

jebmke
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Re: State income tax refund - Claimed if not received?

Post by jebmke » Fri Sep 28, 2018 3:00 pm

senex wrote:
Fri Sep 28, 2018 2:44 pm
jebmke wrote:
Fri Sep 28, 2018 1:36 pm
It may or may not be taxable depending on whether you got any benefit from the deduction. There are some somewhat convoluted calculations...
I believe the principle of what you're saying -- that it will be taxable this year if you got a federal benefit related to state taxes last year, and not if you didn't.

For my personal edification, do you know an example of how that could happen? My understanding is that Sched A has a line item for state taxes, which gets included in the Sched A sum, possibly massaged a bit (but never zeroed), then copied back to your 1040, thus reducing your taxable income. Oh, is your case the case in which you itemize deductions but have no taxable income?
Your first statement is essentially correct but the method to determine this is a little more complicated. There are a couple of places in the IRS instructions that reference all this but I find this calculator helpful

http://cotaxaide.org/tools/Refund%20Calculator.html


For example, one limitation which sometimes results in partial or no taxable income is that the taxable amount is limited to the difference between income tax claimed and sales tax that COULD have been claimed.
When you discover that you are riding a dead horse, the best strategy is to dismount.

senex
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Joined: Wed Dec 13, 2017 4:38 pm

Re: State income tax refund - Claimed if not received?

Post by senex » Fri Sep 28, 2018 3:05 pm

jebmke wrote:
Fri Sep 28, 2018 3:00 pm
For example, one limitation which sometimes results in partial or no taxable income is that the taxable amount is limited to the difference between income tax claimed and sales tax that COULD have been claimed.
Excellent point. Thanks for clarifying (and for correcting my original lack of precision).

1year23
Posts: 43
Joined: Fri Apr 01, 2016 8:31 am

Re: State income tax refund - Claimed if not received?

Post by 1year23 » Fri Sep 28, 2018 7:15 pm

senex wrote:
Fri Sep 28, 2018 1:26 pm
What you did with the refund is irrelevant -- just like a 1099-DIV is taxable whether you reinvested the dividends or received cash.

The 1099-G income is federally taxable if you itemized federal deductions in the tax year that produced the state refund. If you didn't itemize, I'm not sure if you report it and then subtract it out vs. never report it (the 1040 instructions or TurboTax will tell you the right thing to do). It is not taxable by your state; their forms will subtract it out if you add it to federal agi.

The reason for the whole mess is the circular dependency between federal and state taxes (fed tax due depends on state tax due, AND state tax due depends on federal tax due). For better or worse, they break the dependency by having the feds *pretend* you paid a certain amount of state tax (the amount of your withholding). If it turns out you paid less than that (i.e. you got a refund), then the fed's pretending was too aggressive, and they gave you a bigger deduction (if you itemized) than you deserved. They correct it by adding the delta to this year's taxes. It isn't perfect (because your tax bracket could have changed, etc), but it's a reasonably simple way to break the circular dependency.

Thank you so much for sharing this. No one has ever been able to explain this to me before and I could never wrap my head around it

curmudgeon
Posts: 1903
Joined: Thu Jun 20, 2013 11:00 pm

Re: State income tax refund - Claimed if not received?

Post by curmudgeon » Sat Sep 29, 2018 2:37 am

This is one of those areas that can be a bit of a gotcha in transition years. If you are regularly taking standard deduction instead of itemizing, then the refund won't be taxable. If you are consistently itemizing, then the refund is taxable, but the state tax you are paying each year is generally deductible. If you transition from itemizing to standard, though, the refund from last year will count as taxable income, but you won't have a (separate) deduction for this year.

Another spot where this can catch you is in calculations for the ACA subsidy limit; the refund is added to gross income, which is where the ACA subsidy is calculated, but your deduction for state taxes paid comes in calculating taxable income. So if you are close to the ACA cliff, it's wise to try to avoid large taxable state refunds. This would be most likely to be an issue in a year (or following year) when you are transitioning to retirement.

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