State Refund Taxation Question

[jazz4cash]

I understand that state tax refunds have always been taxable if you itemized deductions in the prior year. Now that the State and Local Tax limit is only $10k, those taxes were not actually deducted. Now it seems I still need to pay Federal tax on the refunds according to the Block software and other places I've searched. Does not seem right. My itemized deductions were about $200 more than the standard deduction so I saved less than 50 bucks by itemizing.

Can I take the standard deduction even though my itemized deductions are slightly more than the standard deduction?

Can I legally not claim some of these deductions so the software will use standard deduction instead? I believe that would make a refund for 2019 nontaxable for 2020.

The software automatically takes the higher amount and if I override it will not efile according to the warning flag the popped up.

 

[Sunset]

Nobody is forced to take itemized deductions and include every item possible to itemize.
So if you don't want to use the itemized deductions, just don't fill out those things and instead take the standard deduction.

 

[jazz4cash]

Nobody is forced to take itemized deductions and include every item possible to itemize.
So if you don't want to use the itemized deductions, just don't fill out those things and instead take the standard deduction.

Thanks
That's what I thought but it's tricky getting the software to cooperate. I did find this page that covers the topic in detail but I have diminished ability to focus so it'll take me a while to digest.

https://www.thetaxinstitute.com/ins...-taxation/state-tax-refunds-tax-benefit-rule/

 

[gauss]

I understand that state tax refunds have always been taxable if you itemized deductions in the prior year. Now that the State and Local Tax limit is only $10k, those taxes were not actually deducted. Now it seems I still need to pay Federal tax on the refunds according to the Block software and other places I've searched. Does not seem right. My itemized deductions were about $200 more than the standard deduction so I saved less than 50 bucks by itemizing.

I suspect that there is either a problem/limitation with the Block software or how you are using it. Your state/local refunds are taxable at the Federal level only to the extent that you were able to benefit from them. Ie, at max $200 would be taxable, but probably even less.

This is documented in the IRS documentation. Some tax software will require you to calculate the taxable amount of the refund yourself and then just enter it.

-gauss

 

[kaneohe]

Agree w/ gauss. This is a tricky area and requires a clear mind to navigate so not too surprised that the software is a bit goofy. You might try using this tool
https://cotaxaide.org/tools/Refund Calculator.html to calculate the taxable amount. Be sure you clear/reset before using (upper right corner).

 

[scrabbler1]

I suggest you take a look at page 83 of the instruction booklet for Form 1040. It has a worksheet which figures out how much of your state/local income tax refund is taxable. If it matches what your software is showing, then you are okay. Otherwise, there could be a problem with the software.

 

[jazz4cash]

Thanks everyone. You all are The Best!

I can't believe how complex this is, at least for me. It seems fairly straightforward as gauss described it but it gets incredibly complex in the examples.

I do think this a shortcoming with the Block software. It directs you to Publication 525 which is not easy an document to digest. Next year maybe I Blow That Dow on TurboTax.

I had already found the tool that Kaneohe linked, but I had trouble getting it to work and lacked confidence that it was going to help. I was tired and frustrated at the time. After using the link I was able to use the tool and the result was none of my refund is taxable for 2019.

Before using Kaneohe's link, I was on a path to take the standard deduction for 2019, but that could've limited my ability to itemize on my state return.

I really need to get a better handle on my state tax payments.

 

[kaneohe]

.........................................

I can't believe how complex this is, at least for me. It seems fairly straightforward as gauss described it but it gets incredibly complex in the examples.

...................................................................................

Before using Kaneohe's link, I was on a path to take the standard deduction for 2019, but that could've limited my ability to itemize on my state return.

.......................................................................

The basic idea that gauss gives is a very good thing to remember as it can help your intuition greatly. You have lots of company. I do volunteer taxes for Tax-Aide and whenever I get someone who has a state tax refund, I hold my breath and hope they took the std deduction so I don't have to determine how much is taxable.

Perhaps another thing to try if the software allows it.........itemize but use state sales tax instead of state income tax. If you are SALT limited because of property tax, you might end up w/ the same itemized deduction but perhaps the software would recognize that the state income refund was not taxable.

 

[cathy63]

... Next year maybe I Blow That Dow on TurboTax...

I'm sorry to tell you, but this is not that easy in TTax either, especially if you didn't use their software for the previous year. The problem is that you have to calculate your previous year's taxes multiple ways in order to figure out how much benefit you got from the state tax deduction you took. TTax will give you clear instructions to refigure the prior year taxes using the prior year's software if you have it, or it will allow you to treat the entire refund as taxable.

 

[Montecfo]

I had same situation. Itemized last year and this, but had the state tax cap at 10k.

TurboTax said my state tax refund was not taxable.

Have not filed yet and did not walk through the calculation.

 

[rk911]

to your two questions...yes and yes. pick the deduction that will reduce your payment the most or get the largest refund.

 

[jazz4cash]

I suggest you take a look at page 83 of the instruction booklet for Form 1040. It has a worksheet which figures out how much of your state/local income tax refund is taxable. If it matches what your software is showing, then you are okay. Otherwise, there could be a problem with the software.

Good suggestion. That was easy. I am confused that I was not directed to this worksheet by the Block software, The result is that none of my refund is taxable which agrees with the other tool linked by Kaneohe but I feel more comfortable using the IRS worksheet
Thanks