State Tax Refund, AMT and New Tax Law

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fnmix
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State Tax Refund, AMT and New Tax Law

Post by fnmix » Sun Feb 24, 2019 1:12 pm

Hello,

I started doing my own taxes in 2016 using Turbo Tax (TT, Desktop version). In 2016 and 2017 I was subject to AMT and in both years I had a CA State Tax refund.

Approximately a year ago when I finalized my 2017 tax returns, I recall that TT 2017 (also Desktop version) asked me if I wanted to calculate how much of my 2016 CA state tax refund was taxable using TT 2016. I went through this exercise and the result was that there was no difference in my 2017 Tax return (i.e. doing the calculations using TT 2016 made no difference to the taxability status of my 2016 CA State refund in 2017 and my tax refunds remained the same).

I just finished (but have not yet filed) my 2018 tax returns. I had ~$3500 in CA state tax refund for Tax year 2017 (received in 2018). If I just accept this amount as taxable in TT 2018, my Fed tax refund is ~$1000 and my CA State tax refund is ~$200.

However, when I go through the exercise suggested by TT 2018 of plugging in numbers by hand in TT 2017 in the “Tax Payments” form “line 18 a” and transferring the revised “1040 line 44” (Tax) and “1040 line 45” (AMT) to TT 2018 (State Tax Refund, 1099-G section), my Fed tax refund for 2018 rises to ~$1900. The CA State Tax refund for 2018 remains unchanged at ~$200.

I don’t quite have enough experience with AMT and TT to judge if this behavior is correct. I was hoping that somebody more knowledgeable than me could comment on the following:

Q1: TJCA eliminated AMT for me for Tax year 2018. This elimination seems to have made more of CA State tax refund “not taxable” in 2018, compared to 2017. Is this a reasonable interpretation?

Q2: In Tax year 2017, AMT forced my 2016 CA State tax refund to be more taxable (as 2017 income). Is there a way to recover CA Tax refunds for 2016 and earlier years on my 2018 tax returns?

Thank you in advance. I hope that this thread is useful to others in a similar situation.

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grabiner
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Re: State Tax Refund, AMT and New Tax Law

Post by grabiner » Sun Feb 24, 2019 9:27 pm

A state tax refund is taxable to the extent that you received a tax benefit from the overpayment.

In 2017, you paid AMT, and you received a $3500 state tax refund. Would you still have paid AMT if you did not receive that state tax refund? If so, then you got no tax benefit from it, and your refund is not taxable. If reducing your state tax deduction by $2000 would have eliminated the AMT, then you received a benefit from $1500 of the refund, and only $1500 is taxable. (That is, if you had paid $2000 less in state tax in 2017, and received a $1500 refund, your tax would not have changed.)

The 2018 tax law changes affect the deductibility of tax refunds on your 2018 taxes, which you have not yet received. If you are over the $10,000 limit for state and local tax deductions even after subtracting the refund, the 2018 refund will not be taxable in 2019.
Wiki David Grabiner

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fnmix
Posts: 206
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Location: Northern California

Re: State Tax Refund, AMT and New Tax Law

Post by fnmix » Sun Feb 24, 2019 11:31 pm

grabiner wrote:
Sun Feb 24, 2019 9:27 pm
A state tax refund is taxable to the extent that you received a tax benefit from the overpayment.
Thank you for your reply David.
I spent the whole day, after my initial post, discovering the above in various forum posts and linked articles. Only now am I internalizing it.
grabiner wrote:
Sun Feb 24, 2019 9:27 pm
In 2017, you paid AMT, and you received a $3500 state tax refund. Would you still have paid AMT if you did not receive that state tax refund? If so, then you got no tax benefit from it, and your refund is not taxable. If reducing your state tax deduction by $2000 would have eliminated the AMT, then you received a benefit from $1500 of the refund, and only $1500 is taxable. (That is, if you had paid $2000 less in state tax in 2017, and received a $1500 refund, your tax would not have changed.)
I would have still paid AMT if I had not received the State Tax Refund. I tried this out with TT 2017 by reducing my state tax payments (as recorded in W2) by 3500. The Fed Tax Total remained unchanged (and still showed an AMT amount) and the State Tax Refund dropped to 0.
grabiner wrote:
Sun Feb 24, 2019 9:27 pm
The 2018 tax law changes affect the deductibility of tax refunds on your 2018 taxes, which you have not yet received. If you are over the $10,000 limit for state and local tax deductions even after subtracting the refund, the 2018 refund will not be taxable in 2019.
I had not fully appreciated this point. For my 2018 tax returns, I'll be over the $10,000 limit for state and local tax deductions even after subtracting the refund. However I will not be itemizing in 2018 either. I look forward to not having to think about AMT at all next year.

Thank you again!

amsbogle
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Re: State Tax Refund, AMT and New Tax Law

Post by amsbogle » Sun Apr 14, 2019 6:58 pm

grabiner wrote:
Sun Feb 24, 2019 9:27 pm
A state tax refund is taxable to the extent that you received a tax benefit from the overpayment.

In 2017, you paid AMT, and you received a $3500 state tax refund. Would you still have paid AMT if you did not receive that state tax refund? If so, then you got no tax benefit from it, and your refund is not taxable. If reducing your state tax deduction by $2000 would have eliminated the AMT, then you received a benefit from $1500 of the refund, and only $1500 is taxable. (That is, if you had paid $2000 less in state tax in 2017, and received a $1500 refund, your tax would not have changed.)
I did exactly this, by firing up HRBlock 2017, and kept lowering the amount of my 2017 state withholding until I arrive at AMT of $1. What's shown as the State refund at that point is what I include on line 10 of Schedule 1 (2018).

The question I have is, how do I present this manual calculation to IRS in my 2018 filing? I don't believe the worksheet for Schedule 1 from 1040 instructions, nor Worksheet 2 from Publication 525 are applicable here.

I know I am cutting it close, but any advice would help.

Thanks!

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grabiner
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Re: State Tax Refund, AMT and New Tax Law

Post by grabiner » Sun Apr 14, 2019 9:00 pm

amsbogle wrote:
Sun Apr 14, 2019 6:58 pm
grabiner wrote:
Sun Feb 24, 2019 9:27 pm
A state tax refund is taxable to the extent that you received a tax benefit from the overpayment.

In 2017, you paid AMT, and you received a $3500 state tax refund. Would you still have paid AMT if you did not receive that state tax refund? If so, then you got no tax benefit from it, and your refund is not taxable. If reducing your state tax deduction by $2000 would have eliminated the AMT, then you received a benefit from $1500 of the refund, and only $1500 is taxable. (That is, if you had paid $2000 less in state tax in 2017, and received a $1500 refund, your tax would not have changed.)
I did exactly this, by firing up HRBlock 2017, and kept lowering the amount of my 2017 state withholding until I arrive at AMT of $1. What's shown as the State refund at that point is what I include on line 10 of Schedule 1 (2018).

The question I have is, how do I present this manual calculation to IRS in my 2018 filing? I don't believe the worksheet for Schedule 1 from 1040 instructions, nor Worksheet 2 from Publication 525 are applicable here.
I don't think the IRS requires you to attach a form which explains how you made the calculation. Whatever worksheet you used is something you save for your own records, so that you can substantiate the calculation in case of audit. The law requires you to determine how much of the refund corresponds to a payment for which you received a benefit.

The IRS knows that the total on your Form 1099-G may not match the amount reported on your tax form, as it is common to have a partly-taxable refund. Therefore, the mismatch will not be an automatic audit trigger (as, say, reporting less in dividends than was reported on your 1099-DIV with no explanation on Schedule B would be).
Wiki David Grabiner

amsbogle
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Re: State Tax Refund, AMT and New Tax Law

Post by amsbogle » Sun Apr 14, 2019 9:26 pm

grabiner wrote:
Sun Apr 14, 2019 9:00 pm
amsbogle wrote:
Sun Apr 14, 2019 6:58 pm
grabiner wrote:
Sun Feb 24, 2019 9:27 pm
A state tax refund is taxable to the extent that you received a tax benefit from the overpayment.

In 2017, you paid AMT, and you received a $3500 state tax refund. Would you still have paid AMT if you did not receive that state tax refund? If so, then you got no tax benefit from it, and your refund is not taxable. If reducing your state tax deduction by $2000 would have eliminated the AMT, then you received a benefit from $1500 of the refund, and only $1500 is taxable. (That is, if you had paid $2000 less in state tax in 2017, and received a $1500 refund, your tax would not have changed.)
I did exactly this, by firing up HRBlock 2017, and kept lowering the amount of my 2017 state withholding until I arrive at AMT of $1. What's shown as the State refund at that point is what I include on line 10 of Schedule 1 (2018).

The question I have is, how do I present this manual calculation to IRS in my 2018 filing? I don't believe the worksheet for Schedule 1 from 1040 instructions, nor Worksheet 2 from Publication 525 are applicable here.
I don't think the IRS requires you to attach a form which explains how you made the calculation. Whatever worksheet you used is something you save for your own records, so that you can substantiate the calculation in case of audit. The law requires you to determine how much of the refund corresponds to a payment for which you received a benefit.

The IRS knows that the total on your Form 1099-G may not match the amount reported on your tax form, as it is common to have a partly-taxable refund. Therefore, the mismatch will not be an automatic audit trigger (as, say, reporting less in dividends than was reported on your 1099-DIV with no explanation on Schedule B would be).
Thank you for easing my concern. For my record,I have printed out a re-done 1040 for 2017 showing how the regular income tax increases with an equal reduction in AMT with a net of zero change.

Thanks again.

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