Don't want to claim state income tax

[jskcpa]

Hello All.  I don't know if this is even allowable, but here goes.  Client pays $15,000 in real estate (property) tax.  Thus, already capped out for the $10,000 limit for federal state and local taxes.  They are not subject to NIIT.  I would like to claim $0 of their state income tax withholding on Schedule A for state income tax.  This should reduce the taxability of their state tax refund on next year's return, correct?  This is my thinking.  Any thoughts, suggestions to override the state income tax deduction?  I can't find one.  Thanks!

[George4Tacks · Accepted solution]

Screen 25 > Taxes > Put a 2 in the first box. This will check the box on 5a (If there is sales tax). If you do not have a sales tax, scroll down a bit and put a 1 in for Actual Taxes Paid (Let's assume you crossed the border and paid some tax in a neighboring state (or make up your own story))

https://accountants-community.intuit.com/articles/1608009-state-and-local-sales-tax-deduction

[jskcpa]

George, that works!!  Thanks very much!!

[PhoebeRoberts]

The normal tax benefit rule is going to apply to determining the taxable portion of the refund. No need to fiddle with Schedule A.

[jskcpa]

Hi Phoebe.  Actually, the tax benefit rule is exactly why I need to zero out the state income tax deduction.  I tried it both ways - leaving the state income tax deduction intact and then removing it completely.  Lacerte does its magic in the worksheets to let us know the portion of the state tax refund that will be taxable in the subsequent year.  Leaving the state income tax deduction intact resulted in about 1/3 of the the 2018 state tax refund being taxable in 2019.  When zeroing out the state income tax deduction, the fed and state tax refunds are the same.  However, the state tax refund is not at all taxable in 2019 because there was no state income tax deducted in 2018.  Lacerte's program does an allocation of the $10,000 state and local income and property tax deduction when determining what portion of the state tax refund will be taxable in the subsequent year.  It works for me!

[rbynaker]

I agree with Phoebe.  I'm not on the Lacerte side of the house, but if their worksheet is thinking that part of the state tax refund will be taxable (when other taxes are already >$10K) then it's a bug in the worksheet.  From a federal tax standpoint, if there's no tax benefit (i.e. the tax does not change by including/excluding the deduction), there's no taxable recovery.

I'm much more concerned at the state level with so many different sets of rules in play.  In some states you'll get a taxpayer favorable result by choosing to deduct sales taxes instead of income taxes in these situations.  This is something that's rarely been an issue in the past, but this year I think we should be looking at different situations on a state-by-state basis.  I doubt any tax software is going to be able to analyze this for us.

Rick

[PhoebeRoberts]

The worksheet is wrong. It'll be fixed for next year.

I agree with Rick that forcing the sales tax deduction might be better. I'd have to run the math to see when that would help.