Deducting state tax on federal return

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markcoop
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Deducting state tax on federal return

Post by markcoop » Tue Feb 28, 2012 10:07 am

I use Turbotax to do my taxes each year. One of the benefits is that numbers flow freely where needed. I understand the rule about deducting sales tax or state/local taxes. My question has to do about how to compute the state/local taxes. I see the number Turbotax computed for me. I think I understand how it was computed, but just want to confirm.

1) Start with taxes you actually paid in 2011 (this can simply be found looking at my 2011 W2 statement(s), assuming I didn't pay any estimated taxes or apply last year's refund to this year's return. So Let's give it a number, say $5,000.

2) If I had a refund paid to me in 2011 (for taxes in 2010), subtract the refund amount (do the reverse if I owed). If my refund was $1,000, then I'd have $5,000-$1,000= $4,000.

3) Any credits used to pay state taxes in 2011 (for taxes in 2010) need to be added in. For example, in NY, I got an Empire State Child credit and a dependent care credit. These are considered money I paid for taxes in 2011. If those two amounts totaled $800, I'd have $4,000 + $800 = $4,800. This is the amount I can deduct now doing the tax return for 2011.

Did I have all that right?

Now, if all that is correct, how does a 1099-G form factor into all this? I got a state refund last year. Should I get a 1099-G? I went to a NY gov website to find out since I didn't get a 1099-G and got back the following reply: "Our records indicate that you have no 1099-G amount to report for 2011 filing purposes." Maybe I'd only get a 1099-G if I don't itemize?

Thanks for any clarification
Mark

sscritic
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Re: Deducting state tax on federal return

Post by sscritic » Tue Feb 28, 2012 10:17 am

Refunds are not negative taxes when it comes to your deductions. If you got a refund, you should get a 1099-G.

Read the instructions for Schedule A.
Do not reduce your deduction by any:
· State or local income tax refund or credit you expect to receive for 2011, or
· Refund of, or credit for, prior year state and local income taxes you actually received in 2011. Instead, see the instructions for Form 1040, line 10.
http://www.irs.gov/pub/irs-pdf/i1040sca.pdf

New York is a "Jerk" to put it mildly:
We no longer mail Form 1099-G, Statement for Recipients of State Income Tax Refunds.

For most people, the amount shown on your 2010 Form 1099-G is the same as the 2010 New York State income tax refund you actually received. To find out if you need to report this information on a 2011 federal income tax return, see the instructions for that return, or contact the IRS or a tax preparer.
http://www.tax.ny.gov/pit/file/1099g.htm

They claim you can see it online, but you claim you can't. Call them.
https://www8.tax.ny.gov/PIGI/pigiHome

P.S. The IRS issues instructions so you will know what to do.

markcoop
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Re: Deducting state tax on federal return

Post by markcoop » Tue Feb 28, 2012 10:31 am

sscritic wrote:Refunds are not negative taxes when it comes to your deductions. If you got a refund, you should get a 1099-G.
I came up with the idea that refunds should be subtracted when I was trying to figure out how Turbotax came up with the value it used for state tax deductions. The number looked odd to me. So, I played around with all the values I had (amount of state taxes paid, amount of credits, amount of refund). When I came up with the above equation, it equaled the value Turbotax got.

Guess I need to rethink it.
Mark

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Re: Deducting state tax on federal return

Post by markcoop » Tue Feb 28, 2012 10:51 am

I think I just figured it out. This is from the NY gov website:

"The Form 1099-G amount may also differ because it doesn’t include:
- certain refundable credits, such as the empire state child credit, real property tax credit, earned income credit, child and dependent care credit, farmer’s school tax credit, and the New York City school tax credit."

So, using my example above, I should've received a 1099-G for $200 (Got a $1,000 refund, but $800 of it were refundable credits that apparently you don't have to pay federal taxes on). The example above is slightly different than my situation. My refundable credits were greater than my refund. For example, my refundable credits were $1,200. In that case, since my refund is totally covered by my refundable credits, all my refund in essence was not for taxes overpaid. All my refund was for refundable credits. Therefore, there is no 1099-G for me and I don't need to report my refund on my Federal taxes this year.

This make sense?

To me, these are the dangers of using a program like Turbotax. If you don't understand the details, sometimes it's hard to figure out if I need to enter ther amount of my state refund or not.
Mark

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Re: Deducting state tax on federal return

Post by sscritic » Tue Feb 28, 2012 11:02 am

I commend you for trying to figure this out; too many people just accept what the software says as gospel.

I think the key is that credits are not refunds. You get credits on your federal tax return. They reduce the tax you pay, but they are not refunds. Example: you owe $15,000 in tax; you get a $200 foreign tax credit, so your actual bill is $14,800. Your withholding was $15,400. You get a $600 refund. Did all $600 of the refund come from your withholding? Did some of your refund come from your foreign tax credit? No one knows. The same thing works at the state level. The credit is independent (in some ways) from the refund. I am speaking here as a layman, just thinking about the underlying theory of what a credit is and what a refund is. (They aren't the same.)

Refundable credits on a federal return produce the situation of people who do no withholding, owe no tax, and still get a "refund." But it's not really a refund, it's a transfer payment being made by way of the tax return. So we agree, your "refund" was not a refund.

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Re: Deducting state tax on federal return

Post by markcoop » Tue Feb 28, 2012 11:24 am

Thanks for the comments sscritic.

I just confirmed all this on the phone with a phone number I got from http://www.tax.ny.gov/pit/file/1099g.htm. I asked the person on the phone how many people does she think understands this point. My guess is that most people just enter the whole refund amount and therefore overpay their taxes (assuming they have these credits and itemize). Her response was not many understand it. She has tried to explain it to many people, but few understand it. She's not a tax teacher, just on the phone to answer questions. To be honest, I was very impressed with her ability to understand and answer the question.

Hopefully, someone here will read this and save a couple bucks on their taxes.
Mark

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Re: Deducting state tax on federal return

Post by tfb » Tue Feb 28, 2012 8:08 pm

markcoop wrote:My guess is that most people just enter the whole refund amount and therefore overpay their taxes (assuming they have these credits and itemize).
My guess is that most people just enter the amount on 1099-G and therefore do OK. If the state doesn't issue a 1099-G, they don't enter anything.
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Re: Deducting state tax on federal return

Post by pshonore » Tue Feb 28, 2012 8:15 pm

Remember the majority of people don't itemize and therefore should enter nothing.

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Re: Deducting state tax on federal return

Post by grabiner » Tue Feb 28, 2012 8:47 pm

sscritic wrote:I commend you for trying to figure this out; too many people just accept what the software says as gospel.

I think the key is that credits are not refunds. You get credits on your federal tax return. They reduce the tax you pay, but they are not refunds. Example: you owe $15,000 in tax; you get a $200 foreign tax credit, so your actual bill is $14,800. Your withholding was $15,400. You get a $600 refund. Did all $600 of the refund come from your withholding? Did some of your refund come from your foreign tax credit? No one knows. The same thing works at the state level. The credit is independent (in some ways) from the refund. I am speaking here as a layman, just thinking about the underlying theory of what a credit is and what a refund is. (They aren't the same.)

Refundable credits on a federal return produce the situation of people who do no withholding, owe no tax, and still get a "refund." But it's not really a refund, it's a transfer payment being made by way of the tax return. So we agree, your "refund" was not a refund.
The relevant issue is whether the credit is considered to be an income tax adjustment. Note that NY said that "certain refundable credits" are not included, not all credits. For example, the credit for taxes paid to another state is an income tax adjustment, and thus if you get a refund based on that credit, it should be taxable.

The same principle applies in the other direction as well; some things paid on your income tax form are not income taxes, and cannot be deducted. For example, interest and penalties for late payment of income tax or underpayment of estimated tax are not income tax, and thus are not deductible. And some states allow you to pay use tax on the state income tax form; that tax is not deductible (unless you choose to deduct sales taxes rather than income taxes).
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markcoop
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Re: Deducting state tax on federal return

Post by markcoop » Tue Feb 28, 2012 11:16 pm

tfb wrote:
markcoop wrote:My guess is that most people just enter the whole refund amount and therefore overpay their taxes (assuming they have these credits and itemize).
My guess is that most people just enter the amount on 1099-G and therefore do OK. If the state doesn't issue a 1099-G, they don't enter anything.
Well, at least NY doesn't issue 1099-G forms anymore and I believe I saw at least one other state too. When Turbotax asks the question to enter your state tax, the program specifically says that you may not get a 1099-G. I would expect many people in this situation to just enter their previous year's refund. The fact that some credits are considered an adjustment and others not complicates it even more.
Mark

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Re: Deducting state tax on federal return

Post by interplanetjanet » Wed Feb 29, 2012 6:33 am

Something else to keep in mind is that not all of what is stated on a 1099-G is necessarily taxable, it's only taxable to the extent that your excess contributions over the previous year affected your taxes. If you were in AMT territory the previous year and still would have been if your Schedule A deduction for state taxes was reduced by the amount of your state refund, then none of the dollars refunded should be taxable in the current year.

This caught me out one year and I had to amend - if you're continuously affected by AMT then at least some of the 1099-G will not be taxable.

Aren't taxes fun?

-janet

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Re: Deducting state tax on federal return

Post by iceport » Wed Feb 29, 2012 6:51 am

sscritic wrote:New York is a "Jerk" to put it mildly:
We no longer mail Form 1099-G, Statement for Recipients of State Income Tax Refunds.

For most people, the amount shown on your 2010 Form 1099-G is the same as the 2010 New York State income tax refund you actually received. To find out if you need to report this information on a 2011 federal income tax return, see the instructions for that return, or contact the IRS or a tax preparer.
markcoop wrote:Well, at least NY doesn't issue 1099-G forms anymore and I believe I saw at least one other state too.
Add Connecticut to the list of complete Jerks:

"The Connecticut Department of Revenue Services no longer mails paper copies of Form 1099-G. Your 1099-G information can be accessed on-line using the Departments' Taxpayer Service Center (TSC)."

It's unbelievable. :annoyed (And then to see them piss away hundreds of millions at a pop on long-shot "economic development" gambles...)

--Pete
"Discipline matters more than allocation.” ─William Bernstein

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Re: Deducting state tax on federal return

Post by pshonore » Wed Feb 29, 2012 7:45 am

Some states have refundable Earned Income credits. Connecticut just started this with Tax year 2011. Any resident who gets Federal EITC also gets one from the state (@ 30% of the Federal amount) so is that portion of their state refund not considered a refund to include for next year's Federal tax ? Who decides? The feds or the state? Of course the number of people who get EITC and itemize deductions would be extremely small although there are probably a few out there.

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damjam
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Re: Deducting state tax on federal return

Post by damjam » Wed Feb 29, 2012 9:37 am

interplanetjanet wrote:Something else to keep in mind is that not all of what is stated on a 1099-G is necessarily taxable, it's only taxable to the extent that your excess contributions over the previous year affected your taxes. If you were in AMT territory the previous year and still would have been if your Schedule A deduction for state taxes was reduced by the amount of your state refund, then none of the dollars refunded should be taxable in the current year.

This caught me out one year and I had to amend - if you're continuously affected by AMT then at least some of the 1099-G will not be taxable.
Uh oh. How do I determine the amount of 1099-G that is not taxable?

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Re: Deducting state tax on federal return

Post by grabiner » Wed Feb 29, 2012 9:55 am

damjam wrote:
interplanetjanet wrote:Something else to keep in mind is that not all of what is stated on a 1099-G is necessarily taxable, it's only taxable to the extent that your excess contributions over the previous year affected your taxes. If you were in AMT territory the previous year and still would have been if your Schedule A deduction for state taxes was reduced by the amount of your state refund, then none of the dollars refunded should be taxable in the current year.

This caught me out one year and I had to amend - if you're continuously affected by AMT then at least some of the 1099-G will not be taxable.
Uh oh. How do I determine the amount of 1099-G that is not taxable?
The amount of the refund for a deduction that gave you a benefit is taxable. Suppose that you deducted $6000 for state taxes in 2010, your regular tax was $20,000 in a 28% tax bracket, and your tax under the AMT was $20,140. If you had instead deducted $5500 for state taxes, your regular tax would have been $20,140 and you would have paid no AMT; therefore, the first $500 of your state tax refund received in 2011 did not affect your tax due, and you do not need to report it as income. If your state tax refund was more than $500, the amount over $500 did give you a benefit.

The same principle applies to non-AMT situations; you pay tax on a refunded only to the extent that the deduction gave you a tax benefit. If your itemized deductions were only $500 more than your standard deduction, then only the first $500 of your state tax refund is taxable, because you did not gain any tax benefit beyond that point.

See the Recoveries section in IRS Publication 17 for details.

(edit: corrected a typo)
Last edited by grabiner on Thu Mar 01, 2012 6:53 pm, edited 1 time in total.
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damjam
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Re: Deducting state tax on federal return

Post by damjam » Wed Feb 29, 2012 10:19 am

grabiner wrote:
damjam wrote:
interplanetjanet wrote:Something else to keep in mind is that not all of what is stated on a 1099-G is necessarily taxable, it's only taxable to the extent that your excess contributions over the previous year affected your taxes. If you were in AMT territory the previous year and still would have been if your Schedule A deduction for state taxes was reduced by the amount of your state refund, then none of the dollars refunded should be taxable in the current year.

This caught me out one year and I had to amend - if you're continuously affected by AMT then at least some of the 1099-G will not be taxable.
Uh oh. How do I determine the amount of 1099-G that is not taxable?
The amount of the refund for a deduction that gave you a benefit is taxable. Suppose that you deducted $6000 for state taxes in 2010, your regular tax was $20,000 in a 28% tax bracket, and your tax under the AMT was $20,140. If you had instead deducted $5500 for state taxes, your regular tax would have been $20,140 and you would have paid no AMT; therefore, the first $500 of your state tax refund received in 2011 did not affect your tax due, and you do not need to report it as income. If your state tax refund was more than $500, the amount over $500 did give you a benefit.

The same principle applies to non-AMT situations; you pay tax on a refunded only to the extent that the deduction gave you a tax benefit. If your itemized deductions were only $500 more than your standard deduction, then only the first $500 of your state tax refund is deductible, because you did not gain any tax benefit beyond that point.

See the Recoveries section in IRS Publication 17 for details.
Thank you for the example. I did read IRS Publication 525, the recoveries section, but the example was a little confusing to me.

Also Turbo Tax, it seems, has calculated this incorrectly. I may have screwed it up somehow when I entered the data, but if I'm interpreting your example correctly I shouldn't include my 2010 state refund in my income for 2011. This leaves me feeling very uneasy, computer programs being infallible and all that. :wink:
I calculated my taxes without the benefit of the refund amount as a deduction and yes the taxes are higher, but the AMT is unchanged and still higher than the regular tax amount. So it looks like the refund should not be included in my adjusted gross income.

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Re: Deducting state tax on federal return

Post by interplanetjanet » Wed Feb 29, 2012 1:18 pm

damjam wrote:Also Turbo Tax, it seems, has calculated this incorrectly. I may have screwed it up somehow when I entered the data, but if I'm interpreting your example correctly I shouldn't include my 2010 state refund in my income for 2011. This leaves me feeling very uneasy, computer programs being infallible and all that. :wink:
I calculated my taxes without the benefit of the refund amount as a deduction and yes the taxes are higher, but the AMT is unchanged and still higher than the regular tax amount. So it looks like the refund should not be included in my adjusted gross income.
Sorry if this seems basic, but hopefully you're doing this on the correct year - what you should be doing is recalculating your 2010 taxes after adjusting your tax withheld (in 2010) by the amount of your 2010 refund (received in 2011). If the total federal tax burden for 2010 is the same, then none of the refund (in 2011) is taxable for tax year 2011. If some of them are, vary the amount you change your tax withheld by until you find the breakpoint, once you reach a point where the total tax for the year starts changing then you know that the balance of your refund is taxable.

I don't know how Turbo Tax handles this. TaxAct basically throws up its hands and warns you that working this out is a pain, then asks you to recalculate the previous year's return (easy if you have tax software for the previous year and your old return still installed) with fudged numbers and input them in.

This is one of several reasons I like to have actual installed tax software on my computer - recalculating is much easier. This is one area that could clearly be automated better than it is. That said, it's most convenient simply not to get a state refund, I try to adjust my withholding so I always owe at least a little.

-janet

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Re: Deducting state tax on federal return

Post by damjam » Wed Feb 29, 2012 3:35 pm

interplanetjanet wrote:
damjam wrote:Also Turbo Tax, it seems, has calculated this incorrectly. I may have screwed it up somehow when I entered the data, but if I'm interpreting your example correctly I shouldn't include my 2010 state refund in my income for 2011. This leaves me feeling very uneasy, computer programs being infallible and all that. :wink:
I calculated my taxes without the benefit of the refund amount as a deduction and yes the taxes are higher, but the AMT is unchanged and still higher than the regular tax amount. So it looks like the refund should not be included in my adjusted gross income.
Sorry if this seems basic, but hopefully you're doing this on the correct year - what you should be doing is recalculating your 2010 taxes after adjusting your tax withheld (in 2010) by the amount of your 2010 refund (received in 2011). If the total federal tax burden for 2010 is the same, then none of the refund (in 2011) is taxable for tax year 2011. If some of them are, vary the amount you change your tax withheld by until you find the breakpoint, once you reach a point where the total tax for the year starts changing then you know that the balance of your refund is taxable.

I don't know how Turbo Tax handles this. TaxAct basically throws up its hands and warns you that working this out is a pain, then asks you to recalculate the previous year's return (easy if you have tax software for the previous year and your old return still installed) with fudged numbers and input them in.

This is one of several reasons I like to have actual installed tax software on my computer - recalculating is much easier. This is one area that could clearly be automated better than it is. That said, it's most convenient simply not to get a state refund, I try to adjust my withholding so I always owe at least a little.

-janet
Nothing seems basic about this, and I appreciate any help.

I'm definitely recomputing the 2010 tax.

I took line 43 of the 2010 1040 and added back the tax refund amount, then computed the tax using the "Qualified Dividends and Capital Gain Tax Worksheet." The result of the worksheet is higher than the original amount computed in 2010, but still lower than the recomputed AMT. BTW the AMT total was unchanged. Which makes sense since the refund amount is added to line 1 of AMT(income) and then subtracted from line 3 of AMT(deductions), thus cancelling each other out (at least I hope that's right).

If my computations are correct then Turbo Tax is calculating it wrong. I reentered the data to be sure, and Turbo Tax insists that my tax refund from 2010 is taxable. I hate that, it's like getting the wrong answer from the back of a math textbook. I'd do the problem a dozen times until I could convince myself that I was getting the right answer. Only with taxes I don't feel as sure of my abilities.

If you can think of anything else I might be doing wrong... I just don't want to believe that Turbo Tax would get this wrong because it must impact a lot of people. This is my first year using tax prep software so maybe I was expecting too much.

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Re: Deducting state tax on federal return

Post by interplanetjanet » Wed Feb 29, 2012 7:10 pm

damjam wrote:I took line 43 of the 2010 1040 and added back the tax refund amount, then computed the tax using the "Qualified Dividends and Capital Gain Tax Worksheet." The result of the worksheet is higher than the original amount computed in 2010, but still lower than the recomputed AMT. BTW the AMT total was unchanged. Which makes sense since the refund amount is added to line 1 of AMT(income) and then subtracted from line 3 of AMT(deductions), thus cancelling each other out (at least I hope that's right).
What you want to do is to subtract it from the state taxes withheld line of Schedule A, where you itemize. This is where state taxes actually benefit you in terms of federal tax. This will raise your line 44 tax, but if line 46 is unchanged (regular tax plus AMT differential) then you received no benefit from the withholding that was refunded to you and therefore the 1099-G is not taxable.

-janet

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Re: Deducting state tax on federal return

Post by Leesbro63 » Wed Feb 29, 2012 11:30 pm

grabiner wrote: The same principle applies to non-AMT situations; you pay tax on a refunded only to the extent that the deduction gave you a tax benefit. If your itemized deductions were only $500 more than your standard deduction, then only the first $500 of your state tax refund is deductible
Don't you mean "taxable"?

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Re: Deducting state tax on federal return

Post by songman52 » Thu Mar 01, 2012 12:56 am

I might have missed something but I thought the question was about a state tax refund from a prior year. If so, it should be reported as income on line 10 of the 1040. This applies only if you itemized (federal return) in that year.How much of the refund to include is discussed in chapter 12 of Publication 17.

Perhaps Rube Goldberg should have been hired to simplify our tax code.

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Re: Deducting state tax on federal return

Post by Leesbro63 » Thu Mar 01, 2012 7:25 am

I, also, have a current situation where TURBOTAX reduces the amount of taxable state refund due to the fact that some of it was actually paid to the state in the same year as the refund. That being said, I am not comfortable that the IRS computer won't see Form 1099-G with $1200 refund but my tax return only showing $800 reported. Isn't there some schedule or form to "reconcile" this...to prevent an IRS "Nastygram"?

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Re: Deducting state tax on federal return

Post by sscritic » Thu Mar 01, 2012 7:57 am

Nastygrams aren't really that nasty. When filing my taxes, I prefer the truth to a 1099 that includes items that don't belong to me. My example is married filing separately when living apart for the whole year in a community property state. The 1099 had my name and social security number on it, but not all the income and withholding belonged to me. Nobody is going to issue split 1099s, so we both had to use the truth on our returns. Did I send an explanation? Yes. Did I get a CP2000? Yes. Did I send another explanation? Yes. Did the IRS say "never mind"? Yes. All it took was one letter.

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Re: Deducting state tax on federal return

Post by Leesbro63 » Thu Mar 01, 2012 8:55 am

sscritic wrote:Nastygrams aren't really that nasty. When filing my taxes, I prefer the truth to a 1099 that includes items that don't belong to me. My example is married filing separately when living apart for the whole year in a community property state. The 1099 had my name and social security number on it, but not all the income and withholding belonged to me. Nobody is going to issue split 1099s, so we both had to use the truth on our returns. Did I send an explanation? Yes. Did I get a CP2000? Yes. Did I send another explanation? Yes. Did the IRS say "never mind"? Yes. All it took was one letter.
I somewhat disagree. Nastygrams are a PITA. I've been getting annual nastygrams for withdrawing money from a 529 plan to pay for daughter's expensive college. It's always at least 3 back 'n forths to get it cleared up, and it always starts out with the "guilty until proven innocent" position that I owe $X plus interest and penalty for "cheating". This year I included the withdrawal on the line for OTHER INCOME but noted that it was "ZERO TAXABLE". I doubt it will prevent a Nastygram.

So again I ask my question: Is there a way that can or should "reconcile" a Form 1099-G amount that is higher than what gets reported as the actual taxable amount?

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Re: Deducting state tax on federal return

Post by grabiner » Thu Mar 01, 2012 6:53 pm

Leesbro63 wrote:
grabiner wrote: The same principle applies to non-AMT situations; you pay tax on a refunded only to the extent that the deduction gave you a tax benefit. If your itemized deductions were only $500 more than your standard deduction, then only the first $500 of your state tax refund is deductible
Don't you mean "taxable"?
Yes, and I corrected the post above.
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