state tax refund not reported if no itemization last year?

[DEC-1982]

The source is usually reliable but I would still like to get one (or more) opinion(s) to confirm this.

Source: Kiplinger's Money Facts

If you did not itemize deductions on last year's federal return, don't report a state tax refund as income on this year's return.

 

[PatrickA5]

True!

 

[Senator]

Makes sense. If you got a refund, you deducted your entire state tax but it was not accurate because of the refund.

 

[DEC-1982]

Thanks folks.

 

[RunningBum]

In the 1040 instructions for line 10:




None of your refund is taxable if, in the year you paid the tax, you either (a) didn't itemize deductions, or (b) elected to deduct state and local general sales taxes instead of state and local income taxes.

 

[gauss]

The concept is that a state tax refund is only taxable to the extent to which you benefited from the associated deduction the prior year.

 

[scrabbler1]

It should be pointed out that even if you itemized your deductions in the year you later received a state/local tax refund, you don't necessarily add back all of that refund. There is a small worksheet in the tax instruction booklet which figures out how much of the refund you add back. This is to guard against the instance where your itemized deduction was not much over the standard deduction, and you would have taken the SD if the refund had come to you in the same year, reducing the state income tax deduction so that the total itemized deduction fell below the SD. This has never happened to me, but when I was doing some of that "bunching" of deductions, I was mindful of this and programmed it into my skeleton tax form spreadsheet.

 

[pb4uski]

That makes sense since the purpose of the add back is to true-up the prior year's deductions to reflect the actual state income taxes paid.... like you say, it rarely comes into play but it can if your itemized deductions are just over the standard deduction.

 

[DEC-1982]

Thanks again folks.

<None of your refund is taxable if, in the year you paid the tax, you either (a) didn't itemize deductions, or (b) elected to deduct state and local general sales taxes instead of state and local income taxes. >

After starting with TurboTax, I haven't looked at the instructions for many years. It is quite possible that when I use TurboTax next year, it will already know that I used the standard deduction last year and not ask me to enter the state tax refund. Anyway, I know now to enter 0 if it does ask me.

 

[sengsational]

My refunds have been very small, so the impact minimal, but if the tax software doesn't do this automatically, I've been overpaying. I'm going to look back a few years, just for fun.

 

[Senator]

It also matters if your tax refund was for a prior year than your most recent itemized deduction.

A tax refund from 2 years ago might be taxable.

 

[Sunset]

My refunds have been very small, so the impact minimal, but if the tax software doesn't do this automatically, I've been overpaying. I'm going to look back a few years, just for fun.

Sounds like a riot !! Probably a bit more fun than counting the toothpicks in a 1,000 pick box to see if I got cheated or got a bonus of a few toothpicks.

 

[pb4uski]

My refunds have been very small, so the impact minimal, but if the tax software doesn't do this automatically, I've been overpaying. I'm going to look back a few years, just for fun.

It must be a very slow day in sengsational-land.

 

[scrabbler1]

I mentioned this before in another thread a while back, but I'll mention it again here. It doesn't quite come out the same in the wash when you overpay SALT and get a refund the following year versus getting the refund in the same year. Getting the refund in a later year could end up costing you some extra money in taxes because the refund counts as income, not as a negative offset to deductible taxes paid in Schedule A.


A few years ago, I received a state property tax rebate in the same year I paid the property taxes. Originally, in my skeleton income tax spreadsheet, I had combined this check with another state property tax rebate I received for the previous year's property taxes in Line 10 of Form 1040. But as I was reviewing this at tax time, I realized that the same-year rebate belonged in Schedule A as a reduction in SALT paid. When I made the adjustment, my income taxes dropped for 2 reasons. The first, the largest part, was an increase in my ACA subsidy which is based in part on MAGI. MAGI includes SALT rebates shown as income, not as reductions to Schedule A taxes. The other was a small increase in deductible medical expenses because I was now taking 10% of a slightly smaller AGI to subtract from my actual expenses, leaving me more to deduct.


This effect I also had to take into account when I was figuring out whether or not to "bunch" my deductions over a 2-year period. If I took the SD, I wouldn't have to add back any property tax rebate in the alternating year and would therefore not reduce my ACA subsidy or med expense deduction, either.

 

[cathy63]

My refunds have been very small, so the impact minimal, but if the tax software doesn't do this automatically, I've been overpaying. I'm going to look back a few years, just for fun.

Not to spoil your fun () but yes, all the main tax software packages figure out at least the easy part of the calculation automatically.

If you have more complicated taxes with AMT or limitations on your itemized deductions, then TTax will even guide you through recalculating your prior year fed taxes to figure out if the refund is taxable or not, though you have to do more of the work. Basically you end up comparing the amount of fed tax you would have paid if your state withholding had been the exact amount due vs the amount you actually paid. If they're the same, then your refund is not taxable.

 

[sengsational]

It must be a very slow day in sengsational-land.

Somehow, and I'm not sure how, I never got around to this task

Nice visual, Sunset!