OVERPAYMENT IN STATE ESTIMATED TAX

[J-B00M3R]

In previous year, a client overpaid in state estimated tax by 20k and itemized. He received a 1099g. For this year, he has to pay tax on his 1099g. 99% of his 1099g was his estimated tax. Is there any way to negate tax on 1099g that was from his overpayment of estimated tax? 

[sjrcpa]

Fill out the worksheet. Lacerte does it.

Hint - client couldn't have deducted >$10K state tax last year so that is the most that could be taxable. And did they pay RE tax LY?

EDIT: Taxability does not depend on whether it was estimated tax or withholding.

[J-B00M3R]

Thank you so much for your reply!

client couldn't have deducted >$10K state tax last year so that is the most that could be taxable.

Understood for federal re: >10k. Thank you!
2023: He has w2 + K1 that adds to his personal return's income, and projected his company income to be much higher towards end of year, so he paid a high STATE estimated tax of 20k.

He itemizes, he owns a home with high mortgage interest tax.

Then his company didn't do as well as he thought in last quarter, so his tax liability went way down. Without paying estimated tax, he would have owed state $200. Instead, he got a state refund of $19800 bc he paid $20k state estimated tax.

Now he has a 1099g of 19800 and has to pay tax on it bc he itemized last year.

did they pay RE tax LY?

Yes

EDIT: Taxability does not depend on whether it was estimated tax or withholding.
Got it. Good to know, too bad they don't differentiate overpaying estimated tax for taxable state refunds.

Any other thoughts about other options? Only thing I can think of is amending his last year's to remove Schedule A. His mortgage interest is less than the 19k 1099g. 

[abctax55]

Do some reading on the 'tax benefit' rules.  Lacerte has a worksheet showing this; did you look at it???

To simplify, only the state taxes paid that generated a benefit are taxable.

If your 'client' paid $ 9000 in property taxes, only $ 1000 of the state tax refund is taxable.

[sjrcpa]

They are not subject to tax on $19,800.

They are only subject to tax on the amount of the refunded tax that generated a tax benefit in 2022.

This is a basic concept and you are not grasping it.

Try rerunning last year's tax return without the $20K tax payments. How much, if any, did their total federal tax change?

[abctax55 · Accepted solution]

Susan.... I doubt seriously that last year's return was done in Lacerte.  As there would be a worksheet showing the taxable amount (as you well know).

I sorta doubt Lacerte is being used for 2023, but I could be mistaken...

[J-B00M3R]

Ok understood! I did not run it, just verbally spoke to them and relayed information on here. Thank you for this very much.

[sjrcpa]

Anna, I did figure last year's was not done in Lacerte. But one can still fill out the worksheet in the software or by hand.

You got the solve so you managed to get the point across where I didn't. 😊

[abctax55]

Susan, not quite sure how I managed it <w>.

And Lacerte's worksheet isn't really necessary if one has the concept down.

I have trouble entering the details from scratch in Lacerte anyway. I do what you said, play with the prior year until finding the sweet spot. 

[abctax55]

I was about to suggest CFS Tax Tools...they have a good worksheet.

[J-B00M3R]

I reviewed the worksheet 

for an example if state refund: 5k for Single Filer

State and local tax: 22k (Sched A line 5a+5b)
minus 10k salt 

= 12k

Because 5k is less than 12k, state refund of 5k is not taxed? 

[sjrcpa]

Correct result

[J-B00M3R]

Thank you! And I'm assuming all this is based off of the same year, 
2023 schedule a info & 2023 state refund to see if there was a benefit for the year, and if there was, designated amount for 2023 1099g should be included as income for 2024?