Can anyone answer a state income tax question?

[Tom52]

I am currently working on 2015 federal and state income taxes and have a problem for which I can't seem to find an answer. Maybe there is a tax expert out there that can explain this.

Background-in 2014 I had a fairly large federal tax return, in excess of $15,000. This was primarily from wages earned thru early November 2014 in the state where I used to reside. During 2014 I moved to a new state, after retiring. The move to the new state was September 15, 2014. While completing 2015 state tax for the state I now live, I am required to list my federal tax return received as a result of 2014 federal taxes which increases AGI significantly. Very little of the $15,000 federal tax return was earned while living in my current state. Why should my current state of residence be entitled to add the entire federal tax return earned primarily in another state while residing in that other state? I think a pro-rated sum would seem more fair. What am I missing?

[pb4uski]

The trap that you are caught in is that a state tax refund is income for federal tax purposes if you deducted state income tax in the prior year. Did you itemize deductions in 2014? If so, then it is income in 2015 for federal purposes... the $15,000 of income in 2015 offsets the extra $15,000 of deductions that you received in 2014.

What state are you in? Have you checked the instructions for your state return? Are you sure this item is treated as income for state tax purposes?

[Symbiotic]

Your federal income tax refund should not be counted as income in the new year. So something is messed up.

[pb4uski]

You are right... I think I may have misread the OP... true, federal tax refunds don't count at all as taxable income for state purposes.... OP has something confused.

OP, we need some clarification on the situation.

[target2019]

Say it is 100K earned in State A, where you were a resident through Sept 15.
You took up residence in State B on Sept 15. Some of your 100K needs to be taxed by State B.

If you received a Fed refund of 15K, that doesn't affect state tax calculation.

I think the tax program is not pro-rating your income between states, or you paid State A taxes, and are not getting credit for that on State B form. It would say something like "taxes paid to another jursidiction."

[RunningBum]

He moved in 2014. There is no proration in 2015.


He also doesn't even say he's using a tax program. For all we know, he's simply misreading some instructions.


A lot more clarification is needed. Which state, which tax program (if any). If it is a program, exactly what is the question being asked. If not, what exactly do the instructions say.

[mystang52]

Agreed that more clarification us needed. But I wonder if OP is referring to tax RATE. I don't know if it is still done, but years ago NY determined the tax bracket (i.e., percentage rate) based on total income. Only NY-based income was taxed, but one paid a higher rate on that NY income.

[MichaelB]

Does the current state allow federal tax paid to be deducted from income to then determine state tax liability? If so, that would explain why the federal refund is taxable.

If that is the case, I would guess the amount of the refund that is taxable in 2015 is limited to how much was actually deducted in 2014.

[Tom52]

Apologies for not providing sufficient information.

From 1987 and into 2014 I was a resident of Illinois and my W2 income was received from an Illinois business.

I took a buyout from my employer that allowed me to retire on February 28, 2014 but as part of my package I received my regular paycheck for 36 weeks. My last paycheck was dated Nov. 8, 2014.

During 2014 we sold our Illinois house and moved to Iowa. The actual move date was September 15, 2014.

Yes, we did itemize deductions on 2014 taxes.

I did file a state tax return for both Illinois and Iowa for 2014 taxes.

I attempted to file taxes myself as I have done in previous years via TurboTax but was having some issues that TurboTax support could not help so I decided to go to a local CPA firm to make sure taxes get done properly.

This year I do not have sufficient deduction to itemize so will be taking the standard deduction.

Reviewing taxes with CPA says I have to pay an additional $1176 to the state of Iowa. They tell me this large number is the result of the $15,575 from the 2014 federal tax refund. He showed me on his software if the $15,575 was reduced or eliminated the state tax due was $1,000 less approx.

I don't know what software the CPA firm uses but it is not TurboTax. There does not appear to be any notes or problems or questions their software is asking, he just plugged in the numbers.

Please advise if there is any other information I need to provide. I could see a pro-rated % going to the state of Iowa as very little of the income came while I was an actual resident of the state.

[Jimbo125]

https://tax.iowa.gov/expanded-instru...-received-2014

I hope this link helps.

[bingybear]

Quote:

Originally Posted by Jimbo125 https://tax.iowa.gov/expanded-instru...-received-2014 I hope this link helps.

I wonder how many states give a credit for federal taxes paid? I don't recall ever having this type of credit (and thus inclusion of refund in income the next year) for the few states I've lived in.

I would think the OP should check how much of fed taxes were deducted in 2014... was it all $ or what portion. It may explain the dynamics.

The issue with state taxes... they can be so different state to state. From my experience ... Fed tax refund has not effected state returns... until this post. More stuff to investigate when deciding where to move next

[W2R]

Quote:

Originally Posted by Tom52 I attempted to file taxes myself as I have done in previous years via TurboTax but was having some issues that TurboTax support could not help so I decided to go to a local CPA firm to make sure taxes get done properly.

(emphasis mine)

You are paying the CPA to do your taxes properly. I don't think you are going to find more expert state tax advice from people on a message board living in other states.

At some point you are either going to have to acknowledge (to yourself) that he is a trained and experienced CPA and knows what he is doing (and pay the taxes), or else demand your money back which sounds like a lawsuit waiting to happen. Is this guy THAT bad at what he is trained for and does for a living, day in and day out? This doesn't sound like something that he just saw for the first time.

Actually what your CPA is saying sounds about right to me off the top of my head, but I am not going to do the work it might take to check on what he is telling you.

[target2019]

Quote:

Originally Posted by Tom52 Apologies for not providing sufficient information. From 1987 and into 2014 I was a resident of Illinois and my W2 income was received from an Illinois business. I took a buyout from my employer that allowed me to retire on February 28, 2014 but as part of my package I received my regular paycheck for 36 weeks. My last paycheck was dated Nov. 8, 2014. During 2014 we sold our Illinois house and moved to Iowa. The actual move date was September 15, 2014. Yes, we did itemize deductions on 2014 taxes. I did file a state tax return for both Illinois and Iowa for 2014 taxes. I attempted to file taxes myself as I have done in previous years via TurboTax but was having some issues that TurboTax support could not help so I decided to go to a local CPA firm to make sure taxes get done properly. This year I do not have sufficient deduction to itemize so will be taking the standard deduction. Reviewing taxes with CPA says I have to pay an additional $1176 to the state of Iowa. They tell me this large number is the result of the $15,575 from the 2014 federal tax refund. He showed me on his software if the $15,575 was reduced or eliminated the state tax due was $1,000 less approx. I don't know what software the CPA firm uses but it is not TurboTax. There does not appear to be any notes or problems or questions their software is asking, he just plugged in the numbers. Please advise if there is any other information I need to provide. I could see a pro-rated % going to the state of Iowa as very little of the income came while I was an actual resident of the state.

My apologies for getting the years wrong.

Going to a CPA is no guarantee that the answer is correct. The crux is the extent you benefited from Fed tax that was later refunded. If the CPA reviewed tax records, and says it is right, it might be. But, is it the experienced CPA you spoke with?

[Markola]

I think of financial advisors, including CPAs, as various specialized golf clubs in a bag, to be chosen and pulled out as the situation warrants. I don't use advisors much because I'm genuinely interested and have self-educated in personal finance, saving and investing and have relatively a lot to show for it. I know diddly about taxes and find the topic deadly boring-to-confusing so I have always used reputable CPAs. I also found a terrific fee-for-service financial planner who now works with several family members in Atlanta and recommends the right Vanguard funds for them, helps them set up budgets, and thinks through their various issues, thus allowing me to escape uncomfortable money discussions with relatives. When a trustworthy FA can help with a complex situation, I use them without hesitation just as I would a sand wedge or fairway wood, depending. Good luck!

[pb4uski]

Quote:

Originally Posted by Tom52 Apologies for not providing sufficient information. From 1987 and into 2014 I was a resident of Illinois and my W2 income was received from an Illinois business. I took a buyout from my employer that allowed me to retire on February 28, 2014 but as part of my package I received my regular paycheck for 36 weeks. My last paycheck was dated Nov. 8, 2014. During 2014 we sold our Illinois house and moved to Iowa. The actual move date was September 15, 2014. Yes, we did itemize deductions on 2014 taxes. I did file a state tax return for both Illinois and Iowa for 2014 taxes. I attempted to file taxes myself as I have done in previous years via TurboTax but was having some issues that TurboTax support could not help so I decided to go to a local CPA firm to make sure taxes get done properly. This year I do not have sufficient deduction to itemize so will be taking the standard deduction. Reviewing taxes with CPA says I have to pay an additional $1176 to the state of Iowa. They tell me this large number is the result of the $15,575 from the 2014 federal tax refund. He showed me on his software if the $15,575 was reduced or eliminated the state tax due was $1,000 less approx. I don't know what software the CPA firm uses but it is not TurboTax. There does not appear to be any notes or problems or questions their software is asking, he just plugged in the numbers. Please advise if there is any other information I need to provide. I could see a pro-rated % going to the state of Iowa as very little of the income came while I was an actual resident of the state.

I think the key question is how much was your effective deduction from Iowa income for federal income taxes in 2014 as a result of your being a part-time resident of Iowa in 2014. I presume that there is some allocation of income and deductions or of taxes for part-year residents and that apportionment needs to be considered in determining the addback in 2015.

For example, let's say your deduction was $25,000 but because you were a part-year resident you got a 75% tax credit, so the effective deduction of federal taxes was $6,250 ($25,000 * 25%). If that was the case then it makes no sense that the addback in 2015 would be $15,000, it should be at most $6,250 or arguably $3,750 ($15,000 *25%). The way the forms handle the addback works fine for someone who was a full-time resident both years but may not for someone who was a part-time resident in the year of the deduction and a full-time resident in the year of the refund.

I would suspect that there are some instructions for such situations buried in the instructions or in what the department will accept as I'm sure that you are not the first taxpayer to have this situation.

YMMV but that's my 2 cents.

[cathy63]

Quote:

Originally Posted by Jimbo125 https://tax.iowa.gov/expanded-instru...-received-2014 I hope this link helps.

According to these instructions "The amount reported on this line should not exceed the total amount of any federal tax deduction taken on the prior year(s) Iowa return."

So what you need to do is get out your 2014 Iowa return. Look to see how much of a federal tax deduction you took on that return. Plug in the lesser of the federal refund received in 2015 and the federal deduction taken on your 2014 Iowa return. I am guessing that the actual deduction taken was much larger than the $15K refund received, though maybe not if you prorated the deduction to only the portion of the year you lived in Iowa or only to the income earned while in Iowa.

Alternatively, you could look at filing an amended return for your Iowa 2014 taxes to reduce or eliminate the deduction taken, and then you wouldn't owe tax on the federal refund received in 2015. This only makes sense if the tax and penalties owed for 2014 would be less than the additional tax owed for this year.

The other option is to say you only lived in the state for 25% of 2014, so you're only reporting 25% of that year's refund as taxable. Write a note to that effect in your files, so if you get audited you at least have it as backup. You might lose, but the amount at risk is not that high, so you might decide it's worth it. Your CPA may decide not to prepare your returns if you elect this option though.

[pb4uski]

Quote:

If you received a refund of federal income tax during 2015: You must report the amount on this line. It must be reported even if you used the standard deduction on the prior year's Iowa return. The federal refund must be included on this line because you benefited from being able to deduct federal taxes on the prior year's Iowa return, which reduced your Iowa taxable income for that year. The amount reported on this line should not exceed the total amount of any federal tax deduction taken on the prior year(s) Iowa return.

Quote:

You moved to Iowa in 2015: You are filing an Iowa return for 2015 for the first time because you moved into Iowa during the year. A refund of federal tax received in 2015 is not reported if the tax was not deducted from Iowa income in a prior year.

+1 I think these two instructions collectively suggest that the amount that you add back in 2015 for your federal refund should not exceed the deduction that you received for Iowa tax purposes in 2014. Point these out to your CPA and if they don't think a change needs to be made find another CPA.

[jazz4cash]

Quote:

Originally Posted by W2R (emphasis mine) You are paying the CPA to do your taxes properly. I don't think you are going to find more expert state tax advice from people on a message board living in other states.

I disagree. I never think of CPA's as tax experts unless they specialize and take the time to understand the tax code rather than plugging numbers into software. Based on my experience the set of golf clubs analogy applies. The link provided by Jimbo 125 seems to clarify the situation (but the form linked is for 2014 instead of 2015):

The amount reported on this line should not exceed the total amount of any federal tax deduction taken on the prior year(s) Iowa return.

.....so the next step would be to verify the prior year's deduction which may have been pro-rated if you changed residence during the year.

[pb4uski]

You said what I was trying to say much more succinctly.

[W2R]

Quote:

Originally Posted by jazz4cash I disagree. I never think of CPA's as tax experts unless they specialize and take the time to understand the tax code rather than plugging numbers into software.

Well, then why HIRE one? I don't. But the OP did, and he is paying for the CPA to do it right. If (in addition to paying the CPA) he has to do the taxes himself by asking around on message boards, he might as well hand that money to the first bum he sees on the street. At least, that is my opinion.