Recovery of faux state refund applied to use tax

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boomer_techie
Posts: 682
Joined: Fri Jan 18, 2019 5:47 am

Recovery of faux state refund applied to use tax

Post by boomer_techie »

California (and I assume some other states) collect a use tax payment right on the state tax return. The income tax and use tax are commingled in withholding, estimated, extension, and final payments. I generally make estimated payments as needed (no withholding), and when tax season rolls around calculate the exact total final payment needed, and pay it with a request for extension. (Then I have months to actually prepare and file all the forms.)

Reading the fine print, the use tax payment is apparently considered a refund as far as the federal return is concerned, even though I don't actually receive any money back. Further, a state refund is considered taken pro rata across all payments. So:

For tax year N, estimated state payments during year N could be an itemized deduction on the federal return for year N. The use tax portion of those payments then could be a "recovered" refund in federal tax year N+1. The use tax portion of payments made after the new year, nominally January and April, i.e. in year N+1, could be a federal deduction for year N+1. However, apparently the claimed amounts need to be reduced by the pro rata share of the faux refund applied to use tax.

For tax year 2016, I paid 25% of the state tax during 2016, and 75% in early 2017. (This was enough to meet state safe harbor rules.) For tax year 2017, I paid 95% of the state tax during 2017, and a final 5% in April 2018. Thus the use tax faux refunds are split into 25%:75% and 95%:5% amounts. I itemized for 2017. I did not itemize in 2016, nor will I for 2018. Is this correct:

The 25% is ignored. Never deducted and thus inconsequential.
2017 federal deductions should have been reduced by the 75%.
The 95% is in 2017 deductions but is "recovered" in 2018 (Schedules line 10).
The 5% won't be used.
A state 1099-G will have to be split 95% and 5%.

Ugh! :annoyed

(At least I won't be federally itemizing ever again until the standard deduction and SALT limits are changed.)
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CAsage
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Re: Recovery of faux state refund applied to use tax

Post by CAsage »

I am not sure my understanding is quite in line with yours. First, the "use" tax is a sales tax, not an income tax, and you can choose to deduct either your sales tax or your income tax on your federal return. This is only beneficial to people who live in low-income tax states. And it's a taxpayer declared item - there may be a suggested amount determined by your zip code but you can easily correct it, and enter 0. Since Amazon (and many other online vendors) now collect sales tax, it's way less of an issue than it used to be. So - ignore this for the purposes of your federal return unless your income tax is remarkably low!
Second, just sort the amounts paid in the calendar year 2017 and 2018 and add them up. If perchance you have a refund, and itemized... follow the Turbotax or HRBlock instructions to get it prorated back. Use tax has nothing to do with it.

Perhaps I am wrong? Where do you think anything implies Federal IRS treats this as a refund? I think you have to choose income or use tax, not both. And don't forget the SALT limits...
Salvia Clevelandii "Winifred Gilman" my favorite. YMMV; not a professional advisor.
Topic Author
boomer_techie
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Joined: Fri Jan 18, 2019 5:47 am

Re: Recovery of faux state refund applied to use tax

Post by boomer_techie »

CAsage wrote: Sun Jan 20, 2019 3:54 pm First, the "use" tax is a sales tax, not an income tax, and you can choose to deduct either your sales tax or your income tax on your federal return.
Right. And that's the problem. My state income tax payments include a little extra for the use tax. That little extra isn't deductible. But because of the way it is paid, it is not segregated.
And it's a taxpayer declared item - there may be a suggested amount determined by your zip code but you can easily correct it, and enter 0. Since Amazon (and many other online vendors) now collect sales tax, it's way less of an issue than it used to be.
Here's how the calculations work for California: Assume a CA AGI of $65000. State income tax for me would be $2771. Use tax is then found by looking in a table: $60000 through $69999 yield a tax of $27. This is a base amount to cover all small incidental purchases. Big ticket items' tax is added to the base. In a 9% sales tax area, $27 would be reached with only $300 in purchases. I consider $27 to be a bargain that keeps the state from ever asking for their share on eBay and other such untaxed purchases. So, by next April California wants a total of $2798.
If perchance you have a refund, and itemized... follow the Turbotax or HRBlock instructions to get it prorated back.
I'm a printed fillable form filer. Sometimes even a ball point pen on paper filer.
Where do you think anything implies Federal IRS treats this as a refund? I think you have to choose income or use tax, not both.
Hypothetical estimated payments with a $1000 safe harbor: $300 (April Year N), $400 (June N), $300 (Jan N+1), and $1798 (April N+1). California says "your income tax was $2771, you paid $2798, thus a refund of $27, ... which exactly paid your use tax bill. No check for you, but here's a 1099." On the federal year N return, I itemize* and declare $700 of state income tax payments. On federal N+1, I recapture a portion of the faux $27 refund: The IRS considers only 25% ($700/$2798) of it paid in N, hence a line 10 recapture of $6.75. On fed N+1 I desire to deduct the $2098 portion. Apparently I'm supposed to reduce this by 75% of $27, i.e. $20.25, for a deduction of only $2077.75.

* Ignore that the current tax rules would likely lead to taking the standard deduction at this example income.

So - each year there are two adjustments going on, for tiny dollar amounts. Add more complexity when there's a mix of itemized and non-itemized years. I think the above is correct, but I can't convince myself of that.

Again, Ugh! :annoyed
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