CA refund on form 1041

[11Buster]

Anyone know why Lacerte program shows "full amount" of a prior year state refund as other income this year on line 8, even though the state tax deduction was limited in the prior year due to SALT limitation (10k)?  Maybe a 1041 is computed differently than a 1040?

[sjrcpa]

A 2022 return? It's too early to expect accuracy.

Is there a Diagnostic telling you the program does not apply the tax benefit rule?

The tax benefit rule applies to a 1041, too.

[11Buster]

Someone addressed this in a Lacerte forum in August 2021 mentioning that Lacerte back them was including the full amount of state refund, regardless of the SALT limitation. When I look at a certain trust return in 2020 with a $14k CA refund, yet only $10000 was deducted on line 11 of the 1041, the full amount of $14k was proforma'd on the 2021 form 1041, line 8 and we missed it.

[sjrcpa]

I thought there was a Diagnostic or Alert for that last year.

[11Buster]

Not that I can see, it's the same situation with a 2019 trust return handled the same way on the 2020 federal return.  It's either Lacerte knows something we all don't OR the program has been consistently not programmed correctly.

[11Buster]

Have submitted a "challenge calculation" to Lacerte 12/21/22 and still have not heard back!

[Strongsilence-CPA]

Please let us know. Thanks for raising awareness of this.

I didn't know about challenge calculations. Assuming you don't get one will you do a manual calculation?

By the way, how did the refund originate?

[11Buster]

Yes, if you disagree with any calculation, there is an avenue to pursue with Intuit-Lacerte, whereby you present your case and they will eventually respond.  Mine has been expedited which tends to make me think there might be a (serious) flaw and has been, in the program.  I am actually hoping I am wrong or missing something as don't want to now, possibly, have some amendments to do.

The refund(s) being taxed in the current year, in full, are last year(s) state refund.

[Strongsilence-CPA]

@11Buster 

Caltax has a forum.  https://www.caltax.com/search-results/344164/3/12/

An expert over there has this answer:

Question:lacerte treatment of state tax refund in fiduciary module

Lacerte includes the entire state tax refund as "other income" on Form 1041 regardless of application of tax benefit rule for 10K "SALT" limitation in prior year.  This appears to be incorrect, for example, 50K paid to FTB during 2020 for 2020 CA tax, 10K deducted on 2020 Form 1041, CA 2020 tax 20K and 2020 CA refund 30K.  Lacerte includes 30K on 2021 Form 1041 as taxable state tax refund.  2021 taxable amount should be zero (no tax benefit)?

Monday, May 09, 2022 | By: Mike Giangrande

The tax benefit rule applies to trusts the same way as individuals. You just have to do the calculation manually - Lacerte doesn't do it for you in the 1041 program.

[Strongsilence-CPA]

In my case, a541 for 2021 had 14K of CA income tax withheld from a real estate sale (and it was refunded correctly.) This 14K income tax deduction did not cause any excess deductions. In fact, there were no excess deductions.  

Therefore, no tax benefit arose and none of that 14K should be taxed.   BUT, Lacerte is treating the entire 14K tax withheld as taxable income in 2022.

I'm going to delete the taxable income.

[11Buster]

So I have finally received a response from Intuit/Lacerte:

                "So it has been determined that Lacerte is working as designed. You would have to going to screen 18 and manually remove the tax refund amount if you do not agree with the amount. A product enhancement as submitted for a diagnostic I do not have a time frame on when that would implemented. I apologize as I know this has been a frustrating thing to deal with."

So, while waiting for an eventual reply, we have started overriding the automatic overpayment being taxed at 100% in a subsequent year after proforma'ing the tax return previous year, to be only $10,000 if applicable.  We will now take a look in the "off" season to see what the tax effect is on those clients who have filed in prior year(s), that we also missed, and have over-reported a prior year state refund.

[Strongsilence-CPA]

Thank you.

I need to look at these situations closely.  I wonder if there was even a diagnostic advising us to review the state tax.

[11Buster]

Nope as I mentioned above....seems their most recent response though, indicates one is perhaps on the way.  I have asked for a citation or something from Lacerte as to why they take the position they are taking, but have had no further response.  Wondering why they can't program the software to do the same calculation(s) as the individual module. 

[howardg]

I have been tripped up by this same issue.  The state tax refund is not limited to the prior year salt limitation.  Lacerte says that they can't change the program because the 1041 instructions don't make any reference to state tax refunds.  I reluctantly accept that they can't change the program, but can we at least get an informational diagnostic alerting us to the issue.  Please and thank you.