AGI and State Tax Refund

[jazz4cash]

It seems to me that I am being penalized for having received a "large" state tax refund last year. When I filed '05 taxes, my state tax witholding was included in itemized deductions, so it was subtracted from AGI to get down to taxable income.

In filing for '06 taxes, the refund I received from the state increases my AGI and disqualifies me for various deductions. I understand I need to "undeduct" the refund, but I guess I never noticed the AGI impact before. The full amount witheld was included in last years AGI, and now the amount refunded is being counted a second time in this years AGI........what am I missing?

[perinova]

Same thing happened to me while living in RI. A year after I got a big state refund. I even called to make sure that I couldn' t deduct the money. I was really P.O.d... that was a lot of money.
If I recall if you use the std deduction it is never a problem. Still that just reminds me I have to avoid getting big refunds which I usually like to do as a way to save more money.

[Texas Proud]

Originally Posted by jazz4cash

It seems to me that I am being penalized for having received a "large" state tax refund last year. When I filed '05 taxes, my state tax witholding was included in itemized deductions, so it was subtracted from AGI to get down to taxable income.

In filing for '06 taxes, the refund I received from the state increases my AGI and disqualifies me for various deductions. I understand I need to "undeduct" the refund, but I guess I never noticed the AGI impact before. The full amount witheld was included in last years AGI, and now the amount refunded is being counted a second time in this years AGI........what am I missing?

You are missing that the full amount WAS A DEDUCTION... you got tax savings on the full amount, but should not have...

Now you have to put into income the amount that you deducted "IN ERROR" last year..

[maddythebeagle]

Op, you are actually being penalized for poor planning and is completely fair as pointed out.....I add an anticipated state income tax return amount in my spreadsheet for the following years income....I prepay my state taxes so I can closely estimate what the tax return will be and my state sends the 1099 out pretty early also (in Dec. as I recall) for me to make some reductions...

[scrinch]

Originally Posted by Texas Proud

You are missing that the full amount WAS A DEDUCTION... you got tax savings on the full amount, but should not have...

I think the OP is NOT saying that the state tax amount was in his TAXABLE income twice, just that it was in his AGI twice. The state tax refund is added to the AGI on the front page of Form 1040, but the state tax deduction is taken on page 2. So that particular chunk of change (the state refund) is part of the AGI for two successive years. If deductions are phased out based on AGI (before state tax deductions on page 2) then he is indeed being penalized for overwithholding.

[maddythebeagle]

huh? I dont think you are getting to the point...we have had several threads on this topic...folks prepaying state taxes, etc. to reduce their current years taxes....it all has to even out.....and you are simply pushing more income into the next year (and you have to account for it, which it doesnt sound like the OP did) and doenst think it fair, which I think it is...he isnt getting double taxed on the money....he is rather putting off til next year (and in this case), it ended up screwing him....

[scrinch]

Originally Posted by Maddy the Turbo Beagle

huh? I dont think you are getting to the point...

I fully understand your point. The OP's point is a little subtle, and doesn't have to do with the save-this-year-pay-next-year overall accounting. It has to do with where the refund is added in on the tax return, and whether deductions are phased out based on AGI (Line 38) or Taxable Income (Line 43). The point is that his deductions eligibility was determined based on his full income (including state withholding) in year one, and then based on full income (including state withholding) plus his state refund in Year 2.

Let's say you make $100k for two years. You overpay your state tax in year 1, so you get a $10k refund. In year 2, you include the $10k as income and you even up the taxes from year one. This is you thinking, right? So far, so good. The OP's point is that his AGI will be $100k in year 1 and $110k in year 2. He only earned $200k in that time, but his AGI will contain the $10k of the refund in both years. Since the AGI amount is used for phasing out deductions, he got to use fewer deductions in year 2 than the guy who didn't overpay his state taxes and had an AGI of $100k in both years.

[jazz4cash]

Originally Posted by scrinch

I think the OP is NOT saying that the state tax amount was in his TAXABLE income twice, just that it was in his AGI twice. The state tax refund is added to the AGI on the front page of Form 1040, but the state tax deduction is taken on page 2. So that particular chunk of change (the state refund) is part of the AGI for two successive years. If deductions are phased out based on AGI (before state tax deductions on page 2) then he is indeed being penalized for overwithholding.

ding, ding, ding!
Thank goodness Scrinch gets my point. I guess I was too ticked off to express myself clearly. I fully understand that taxes deducted, then refunded last year must be un-deducted this year (Texas). I fully understand this will even out on the state tax deduction.........but I just never paid much attention to the impact on AGI. At first I was just "sorta ticked" about bumping the AGI up, but as I thought about it, the refunded portion of the AGI is actually counted twice. It would be more reasonable to add the refund back after AGI or offset current years Sched A deduction.

I confess to planning this poorly (Maddy), but in my defense state taxes in the old homestead were an afterthought. Now that I am in Maryland, I gotta step up my game. This penalty claimed a portion of my tuition deduction..........Its a racket, I tellya!

[Texas Proud]

OK... I see your point it this....

You have it twice in AGI, but your taxable income is 'correct' over both years.. yr 1 in both AGI and deductions, but year two only in AGI (because it should not have been deducted in year one)

One of the pitfalls of state income taxes it appears...

Let me ask a question for the people who actually pay state taxes (I do not)..

Can you go back and amend your prior year return Or do they REQUIRE you to put down what was paid into the state as a deduction??

[jazz4cash]

Originally Posted by Texas Proud

OK... I see your point it this....

You have it twice in AGI, but your taxable income is 'correct' over both years.. yr 1 in both AGI and deductions, but year two only in AGI (because it should not have been deducted in year one)

Actaully, taxable income is higher because the addition to AGI limits deductions......

Originally Posted by Texas Proud

One of the pitfalls of state income taxes it appears...

Let me ask a question for the people who actually pay state taxes (I do not)..

Can you go back and amend your prior year return Or do they REQUIRE you to put down what was paid into the state as a deduction??

I can't think of anything that could be amended in last year's return. I have an "idea" that if I designate this year's refund toward next years state tax, it would not get added back to AGI. It would then be deductible as state tax paid and I could maybe tweek the W-2.

[Texas Proud]

Originally Posted by jazz4cash

I can't think of anything that could be amended in last year's return. I have an "idea" that if I designate this year's refund toward next years state tax, it would not get added back to AGI. It would then be deductible as state tax paid and I could maybe tweek the W-2.

That does not sound like it would work... haven't you already gotten the check?? If not, then I would think that you do not have a problem....

Note... I am thinking of 2005 tax years.. you got your 2005 tax refund in 2006 and now have to report it on the current tax form...

[jazz4cash]

Originally Posted by Texas Proud

That does not sound like it would work... haven't you already gotten the check?? If not, then I would think that you do not have a problem....

Note... I am thinking of 2005 tax years.. you got your 2005 tax refund in 2006 and now have to report it on the current tax form...

Your're correct.....I was refering to avoiding the problem for 2006 tax year.

[Texas Proud]

Originally Posted by jazz4cash

Your're correct.....I was refering to avoiding the problem for 2006 tax year.

I think you mean the 2007 tax year... if you requested your 2006 refund and got it...

You should change your withholding and not get a refund at all... always plan on paying when you submit your return... just my opinion...