Loophole? Why a 1099-G is tax deductible on the state income?

[international001]

I found this:

https://www.ncdor.gov/taxes-forms/indiv ... 1099-int#8

Does it apply to all states?

I get a 1099-G if I do a state amendment for a year in which I I did itemized deductions.
I expect the amount to be income for federal return since state deduction on that year effectively decreased.
But why should I deduct it from state income for the year when I receive the 1099-G. I'm settled with state, so it seems like free money (via deduction).

[EdNorton]

It is included in your federal income in the current year because you deducted it in the prior year, assuming you itemized your taxes the prior year. It's a subtraction from your state's income because you did not get a state deduction in the prior year, assuming your state does not have itemized deductions. If you didn't itemize the prior year, you don't include it in income for federal.

[Faith20879]

I found this:

https://www.ncdor.gov/taxes-forms/indiv ... 1099-int#8

Does it apply to all states?

I am in MD and have never filed an amendment because of a 1099-G. For the following year though, I use the SALT refund worksheet to decide whether such refund is taxable. If it is, add to my income on schedule 1, otherwise ignore. This is only applicable if I itemize in previous year.

[international001]

I am in MD and have never filed an amendment because of a 1099-G. For the following year though, I use the SALT refund worksheet to decide whether such refund is taxable. If it is, add to my income on schedule 1, otherwise ignore. This is only applicable if I itemize in previous year.

Causality is the other way. You do an ammendment, and you get a 1099-G
I understand the federal part, just not the state one

[Katietsu]

The deduction on the state is from the increased federal AGI to get your state back to where it was. You only deduct the state refund on the state tax if:
1) the state uses a calculation that starts with federal AGI; and
2) that federal AGI includes an amount attributable to the state refund.

[international001]

It is included in your federal income in the current year because you deducted it in the prior year, assuming you itemized your taxes the prior year. It's a subtraction from your state's income because you did not get a state deduction in the prior year, assuming your state does not have itemized deductions. If you didn't itemize the prior year, you don't include it in income for federal.

I didn't need the state deduction on the first year.

Forget Federal deducttions modifications (I understand them)

My 2018 state return I paid $2000 in taxes, but I should have paid $1500. On 2018 I itemized federal tax.
On January 2020, I do an amendment for my 2018 state taxes , they return me $500 in a check a few months later (consider interest $0)
They send me a 1099-G for $500 for year 2020 (when I got the check)
When I do my 2020 return for the state, I get to deduct $500. So if my taxable income was $40000, now it's $39500. Assume tax 5% flat rate. I just saved $25 via a loophole

Where is my logic wrong?

[EdNorton]

It is included in your federal income in the current year because you deducted it in the prior year, assuming you itemized your taxes the prior year. It's a subtraction from your state's income because you did not get a state deduction in the prior year, assuming your state does not have itemized deductions. If you didn't itemize the prior year, you don't include it in income for federal.

I didn't need the state deduction on the first year.

Forget Federal deducttions modifications (I understand them)

My 2018 state return I paid $2000 in taxes, but I should have paid $1500. On 2018 I itemized federal tax.
On January 2020, I do an amendment for my 2018 state taxes , they return me $500 in a check a few months later (consider interest $0)
They send me a 1099-G for $500 for year 2020 (when I got the check)
When I do my 2020 return for the state, I get to deduct $500. So if my taxable income was $40000, now it's $39500. Assume tax 5% flat rate. I just saved $25 via a loophole

Where is my logic wrong?

It is not deductible on your state return in 2020 unless it was in your federal taxable income. So if you're in the 22% Fed tax bracket, that loophole cost you $85 ($110 Fed tax less $25 state tax savings).

[toddthebod]

It is included in your federal income in the current year because you deducted it in the prior year, assuming you itemized your taxes the prior year. It's a subtraction from your state's income because you did not get a state deduction in the prior year, assuming your state does not have itemized deductions. If you didn't itemize the prior year, you don't include it in income for federal.

I didn't need the state deduction on the first year.

Forget Federal deducttions modifications (I understand them)

My 2018 state return I paid $2000 in taxes, but I should have paid $1500. On 2018 I itemized federal tax.
On January 2020, I do an amendment for my 2018 state taxes , they return me $500 in a check a few months later (consider interest $0)
They send me a 1099-G for $500 for year 2020 (when I got the check)
When I do my 2020 return for the state, I get to deduct $500. So if my taxable income was $40000, now it's $39500. Assume tax 5% flat rate. I just saved $25 via a loophole

Where is my logic wrong?

Your logic is wrong because line 1 of your North Carolina tax return is your Federal AGI. If you are including your 1099-G on your Federal tax return, that number is now $500 higher. Then, you get to deduct your 1099-G on your state tax return, thus backing out that $500, leaving you even.

Your logic assumes you are independently entering your W2 and 1099 on your North Carolina return.

[international001]

You are absolutely right. I went through my tax return and yes, the 1099-G amount is added to the AGI in federal, this goes to 'Federal Tax INcome' in state and from there the 1099-G is deducted again. So at then end, is a wash for state taxes.

Thanks a lot. It was bothering me and never thought about double crossing it with Federal return. It's great to have BH folks so knowledgeable in all these details.