Oregon federal tax subtraction is incorrect

[cinmon428]

Previously I indicated that the federal tax subtraction for 2020 on the Oregon return is incorrect, because only the first stimulus was reducing the amount of the federal tax subtraction. I believe this is a bug in the program, because when I indicate that I did NOT receive the second stimulus (and therefore should be credited on the federal return), then the second stimulus DOES get subtracted on the Oregon return. But if I indicate that I HAVE already received the second stimulus, then there is no subtraction on the Oregon return. This does not seem like a problem with an update, but rather a bug. So let me be specific: The amount showing for the second stimulus received (line 19 on the Recovery Rebate Credit Worksheet), while it SHOULD reduce the 2020 federal tax liability subtraction on Oregon Form 40 (line 10), it DOES NOT. Can someone report this for me to the people who fix these things or let me know how I can tell them? I don't see any workaround without getting hit with errors in the program. 

[George4Tacks]

@IntuitBettyJo will pass this one for you.

[cinmon428]

Much obliged!

[BobKamman]

It’s always dangerous to follow the instructions, but what Oregon tells you is:

“Enter the tax rebate (economic stimulus payment) you received from the federal government in 2020 [emphasis added] plus your recovery rebate credit, if any (Form 1040 or 1040- SR, line 30).”

This amount is subtracted from 2020 actual tax, so it reduces the federal tax deduction (FTD).

So if EIP#2 was not received, it will result in a recovery rebate credit, and a lower FTD.

If it was received, it would have been in 2021, not in 2020, so there is nowhere it needs to be entered.

Isn’t this what you are saying the program does? If so, where is the error? Always remember, don’t expect taxes to be logical.

[cinmon428]

I do see your point and I have asked for a ruling by Oregon about that. But as you say, instructions are not always to be believed. The instructions you quote were undoubtedly made before the second stimulus came out, and therefore the need for the ruling. 

[cinmon428]

Further, I don't see how it makes sense that the second stimulus subtraction would be calculated to reduce the federal subtraction  if you DID NOT receive the second stimulus yet, but it WOULD NOT be calculated to do the same if you DID receive the second stimulus. That's absolute nonsense. I've been doing this long enough to know that taxes aren't logical, but this is ridiculous. 

[cinmon428]

If you want to see what I see regarding this error, set up a fake account, single (doesn't matter), income of say, $60,000. Before you fill in the Rebate worksheet, check the amount of the Federal tax subtraction on the Oregon return. Now go to the (federal) Rebate worksheet and type in $1200 received for the 1st stimulus. Leave the 2nd stimulus blank. Go back to Oregon and check the Federal tax subtraction now. You'll see a decrease of $1200 there. Now return to the Rebate worksheet and type in $600 received for the 2nd stimulus. Return to Oregon and check the Federal tax subtraction again. NO CHANGE!! 

Ok, now delete what was typed on the Rebate worksheet and start over. This time, indicate that you have NOT received any rebates. In other words, fill in zero for each stimulus received. Go back to the Oregon return. You'll see that the Federal subtraction has been reduced by a FULL $1800.

Does that make sense? It does not. 

[George4Tacks]

Taxes - Logical NOT ALWAYS - Nonsense  QUITE OFTEN 

This is going to be a wonderful year. 

Possibly you will just need to wait a bit for the software to catch up to the new year. 

Next scenarios - You did not receive the EIP and the 2020 tax is reduce by the would have been EIP - You did get the EIP in 2021, but it was not appropriate based on 2020 income and you did not have to pay it back - ...

This is going to be a wonderful year. 

[cinmon428]

Well if you got the EIP because your income was lower in 2018 and/or 2019, you wouldn't have to pay it back in 2020 for federal, and for Oregon, you would show on the Rebate worksheet that you got it (both of them, let's say). Then you would still have the problem for Oregon that the second stimulus wasn't taken into account. But if you hadn't gotten it yet and you indicated that you wanted it, I assume you wouldn't get it because your income is now too high. I haven't tried that scenario yet for what it would do to the Oregon subtraction. I'm afraid to. 

[BobKamman]

Now go to the worksheet on Page 13 of the Form OR-40 instructions and fill it out according to your hypotheticals.

Although most items of income and deduction are calculated on the cash basis, Oregon uses accrual basis for the federal tax deduction. Fill out the worksheet for a single person with $100,000 income who owes $1,000 in federal tax and has paid nothing by December 31. The deduction is still $1,000, right? EIP’s have nothing to do with it.

What happens in 2020, stays in 2020. The recovery rebate credit was enacted in 2020. If some of it is used on the 2020 return, it reduces the deduction on the 2020 return. If some of it accrued in 2021, wait till next year and there will be a place to make that adjustment.

Intuit programmers have enough to do for the rest of us, without falling down this rabbit hole.

[cinmon428]

You haven't taken into account those people who did not receive the second stimulus. You are required to fill out the federal Rebate worksheet, right? You are required to enter how much you received for each stimulus. Let's say you received zero for the second stimulus and you enter "0" on the rebate worksheet. Now go to the Oregon return. Oregon has subtracted the amount you received as a credit on your federal worksheet for that second stimulus. So if you are single and you are due $600, then the program calculates a $600 subtraction for that second stimulus on your 2020 Oregon tax return, EVEN THOUGH YOU HAVEN'T RECEIVED THE MONEY YET. 

[cinmon428]

I don't think it's necessary to add nasty comments like you did, by the way. Why don't you try to do better next time?

[cinmon428]

The deduction is still $1,000, right? EIP’s have nothing to do with it.

This has nothing whatsoever to do with the issue. We are talking about the Oregon Federal Tax Subtraction and how the EIP and/or the Rebate received on the tax return affects it. And although the second stimulus EIP DOES NOT affect it on Proseries and Turbo Tax (and I believe Oregon will tell me that it should), the Rebate for the second stimulus (ie when you request a credit on the return) DOES cause a reduction to the Federal Tax Subtraction. Try it before you respond and you'll see I'm right. And this is a problem. It's a problem that the "software people" are required to fix. 

[cinmon428]

....UNLESS you're telling me that the EIP is based on the cash basis, so that money received in 2021 is NOT reported, while the Rebate tax credit is based on the accrual basis? Is that what you believe?

[BobKamman]

Generally, you include an amount in gross income for the
tax year in which all events that fix your right to receive the
income have occurred and you can determine the amount
with reasonable accuracy. Under this rule, you report an
amount in your gross income on the earliest of the following dates.
• When you receive payment.
• When the income amount is due to you.
• When you earn the income.
• When title passes.

I get 2021 for all of those for EIP#2 – after all, Treasury promised that everyone would get a payment who was entitled to one, so there must be something defective about those who claim it was due and they earned it at the moment the bill was finally signed.

[BobKamman]

@cinmon428  "I have asked for a ruling by Oregon about that."

Maybe @George4Tacks can pass that information along to the Intuit programmers also.  

[cinmon428]

Ok, we will see what the Oregon Department of Revenue tells me. 

[cinmon428]

https://www.oregon.gov/dor/programs/taxpro/Documents/2020-Oregon-New-Law-Update-for-Attendees.pdf

Check page 17 here. You'll see, according to the Dept of Revenue's own course, that both stimuli are to be be used to reduce the federal tax subtraction.

[BobKamman]

Keep trying.  That course was put together December 14 -- they must have done a very fast edit after the bill was signed December 27.  Could be that a Tax Auditor 2 making $77,000 is the expert.  But maybe not.  

[cinmon428 · Accepted solution]

Good afternoon

For the Federal Tax subtraction calculation you would want to include both the first and second stimulus payment. Although the second stimulus payment was issued in the year 2021, the way the legislation was passed it’s intended to be a credit that affects the 2020 tax period and would therefore be used in the Oregon Federal Tax subtraction calculation for the 2020 return. Our e-filing coordinators have clarified this matter with the tax software vendors and asked they update their forms to correctly calculate this subtraction, the tax software companies should be updating their programs accordingly.

Thank you

Our response is based on the information you included in your e-mail.  If your situation or facts change, or you need more information, please contact the Department of Revenue again. 

Best Regards,    

Crisel

Tax Practitioner Specialist

Oregon Department of Revenue

Office: 503-947-3541

               503-378-4988

Fax:       503-945-8736

Email: [email address removed]

Data Classification Level 3 – Confidential

[George4Tacks]

@cinmon428 Thank you for that wonderful update. You can mark it as the solution, making it easier to find for anyone searching. 

Have a great tax season!

[BobKamman]

Welcome to Oregon Tax Jeopardy!  Alex Trebek is no longer with us, but you can still play along.  We will give you the answer, and then you have to correctly guess the question in the form that it was asked.  

Nothing here addresses the issue of someone who has not  received EIP #2, and may not.  So is the state going to revise the tax form instructions?  Or is this just a secret shared with practitioners?  There are probably some media people in Oregon who know a good tax story when they see it.  

[climbon05]

Hi...I don't mean to beat a dead horse here but I want to be sure I understand something. Prior to inputting my simuls I had a refund both fed & state. Post entering my stimulus: Fed unaffected as I would expect, State I now owe. I noticed after inputting the $1200 stimulus as the software requested I am now in a "owe" situation. Is it true this is somehow taxable by the state? 
OR Fed Tax Liab Subtraction Worksheet:
  Fed Tax Liab                  5,839
  Recover Rebate Credit  1,200
  Subtract 9 from 5            4,639
  Max allowed                    6,950
  Smaller of 10 or 11          4,639
Can someone help me understand why this is taxable? Why it is reducing the fed liability that ends up increasing my taxable income? I was under the impression the stimulus was not taxable...but maybe OR Dept of Rev believes differently from IRS (Fed)?
Thank you for any explanation someone can give.

[George4Tacks]

I think much of the confusion lies around what the name is. Although none of Economic Impact Payments made were taxable, they are Recovery Rebate Credits that do reduce the federal income tax for 2020. Just like a refund of 2019 federal tax during tax year 2020 would reduce federal tax. Oregon is a bit hinky among the states in using federal tax as a deduction. I believe Lacerte got it right. 

When all else fails, read the instructions page 13 🎠

[cinmon428]

The stimulus payment reduces the federal tax subtraction on the Oregon return. Why? Because Oregon Dept of Revenue says it does. There are other items that also reduce the federal tax subtraction, if you have them, like the American Opportunity refundable credit. But let's stick with the stimulus payment. Last I checked, there is still an error in the software. The second stimulus payment is also supposed to reduce the federal tax subtraction (as per the guidance from Dept of Revenue that I posted), but the software doesn't do this. So you have to override the software and uncheck the error box when efiling in order to reduce the federal tax subtraction even more (thus increasing the Oregon tax or reducing the Oregon refund) to get it correct. Otherwise, your client will likely receive an adjustment letter from Oregon. There is no problem with the software if the client did not receive either stimulus and instead is requesting a rebate credit on the federal return. In that case, the software correctly subtracts the total rebate credit from the federal tax subtraction on the Oregon return. The only issue occurs when the second stimulus was already received. 

[BobKamman]

@climbon05 

Your result is what to expect from following Oregon published guidance. You can make up your own rule and phrase a question so that someone in Salem agrees with you, or you can wait until all Oregon taxpayers are told that there is a mistake in the instructions.

From Oregon Publication OR-17, page 65

The [federal tax] subtraction is based on the accrual method of accounting. This means you subtract the total amount of your federal tax liability after credits for the current tax year (not less than zero) as shown on your original return, regardless of when you pay it.

[cinmon428]

If you want to go to Oregon Tax Court and fight this, be my guest. You can't make up your own rules. 

[cinmon428]

Your comment about the accrual method of accounting is nowhere to be found in Publication 17, page 65. Let's be clear about that. 

[cinmon428]

My mistake, they do say that on page 65. But the letter I received from guidance contradicts that. 

[cinmon428]

I just called the Oregon Revenue tax hotline and was told the same thing as in the letter I received--BOTH stimuli are advance payments and BOTH have to reduce the federal tax subtraction on the Oregon return. That's their position. 

[BobKamman]

@cinmon428 

I just faxed a Public Records Request to the Oregon Department of Revenue, asking for copies of instructions or other guidance they have issued to software developers, particularly Intuit.  In a separate request, I asked for any instructions they have issued to the general public or news media on this issue.  

The Oregon bureaucracy has a reputation for slow-walking Freedom of Information requests, but I would rather have it right than have it fast.  Also, some newspaper people are interested in this "I've Got A Secret" approach to tax administration.  

[cinmon428]

Our e-filing coordinators have clarified this matter with the tax software vendors and asked they update their forms to correctly calculate this subtraction, the tax software companies should be updating their programs accordingly.

This is part of the message I pasted above, from Crisel of the Oregon Department of Revenue. 

[OregonBridge]

I just went round and round with TurboTax support on the same problem. I received my 2nd Stimulus payment in December, but only the 1st one flows through to the Oregon Federal Tax Liability Subtraction Worksheet. Can not seem to get the support team to understand the problem.

[cinmon428]

I checked Turbo Tax about a week ago and found they haven't fixed the problem either. Two people from OR Dept of Revenue said that BOTH stimulus payments need to be subtracted. On ProSeries I can override the program and uncheck the error box when I efile and the return will be sent. I don't know about Turbo Tax. I was told by Dept of Revenue that if the return is incorrect, the taxpayer will receive a letter correcting the return with the second stimulus also reducing the federal tax subtraction when it's still above zero. 

[BobKamman]

@cinmon428 

Exactly.  I just want to see what they told Intuit to do.  It's not that it's a state secret.  And it's a good story, if they didn't tell anyone else about it.  

[BobKamman]

@OregonBridge 

Technically, I don't think anyone received their EIP#2 in December -- but some of the banks got a notice on December 31 from Treasury that the money would be there on January 2, and they added it to the accounts as a favor to their customers.  

And this is the issue: (A) Both EIP's received, so there is no Recovery Rebate Credit; vs. (B) only the first EIP received, so that a Recovery Rebate Credit is allowed for EIP#2, therefore reducing the federal tax deduction and increasing the state tax.  If the state tax is the same either way, then the instructions are wrong.  If the instructions are wrong, a couple hundred thousand Oregonians trying to do their own returns are getting screwed.  That doesn't bother you?  Why not?

You write, "Can not seem to get the support team to understand the problem."  That's why it's easy for some people to come up with the answer they want, just by phrasing the question in a certain way.

[cinmon428]

It does bother me, but I can't do anything about it. All I can do is protect my own clients from penalties when they get a letter adjusting their returns in 2023 or whenever it comes. 

I think it's clear. The second EIP is mistakenly not included in the subtraction by the software (but the rebate, if used, is counted) but it was an advance payment (accrual system) and that fits the Oregon rules to be counted as a further reduction to the fts. 

[BobKamman]

@cinmon428 

“The only thing necessary for the triumph of evil is for good men to do nothing.” ― Edmund Burke

[cinmon428]

Look, pal--I spent hours and hours trying to get Intuit to change this. I was given lip service and told it would change. I have had enough of trying. I'm more than busy with my clients and I have a way of solving the problem. If you want to change the world, go ahead. I'll be grateful. But don't tell me I haven't done anything. That's abusive. 

[BobKamman]

@cinmon428 

You haven't done anything to raise the issue to Department of Revenue management, and higher.  Oregon has a Governor and Legislature, you know.  They don't like hearing that voters are being screwed -- especially when they're the last to find out.  

[cinmon428]

You're right. That's what you're going to do. But I thought we already agreed on that. My job is to get my client returns done in a timely way and I can't run to Salem and start screaming. Apparently you have lots of time on your hands. 

[climbon05]

Regardless of the slug pace of the state...people need their returns these days and having this error still be an issue within the software is SO unacceptable. 
I really appreciate yours and cinmon428s dialog...very confirming.

[Geni]

I don't understand why the subtraction needs to be made in the first place, since it is not to be taxed.  The reply I got from a policy person was that is isn't taxed, it is subtracted from the federal tax subtraction.  So in essence, it is taxed, just buried in the math calculation!

[cinmon428]

Bingo! It's Oregon's way of raising taxes without telling anyone. 

[Geni]

That is correct, but the Lacerte program doesn't handle it correctly.                                   And that does make it taxable to Oregon.

[Geni]

You are correct, the EIP reduces the federal tax subtraction on Oregon return, in essence making the EIP payment taxable in Oregon.  I don't care how they spin it, that is the end result.

The program was handling in correctly.  I spent several hours with several people at Lacerte yesterday afternoon.  Charles finally got it.  Today I got an email that they had corrected it and the update came at approx. 2:45 this afternoon.  I should work correctly now and do the math calculation according to Oregon worksheet for Line 10.

[Geni]

Lacerte, on Feb. 3rd, said they got no direction like this from Oregon Dept. of Revenue.

[cinmon428]

Proseries Basic is incorrect (still) as of 4 pm Pacific Time 2/4/2021

[Geni]

Yesterday, Feb 3rd, Lacerte said they received not direction from ODR about this issue.

[Geni]

The update to correct this was posted today, Feb. 4th, at about 2:45 PST.  I was on the phone with them yesterday for several hours.  Charles finally got it and sent the problem to their development team.  This morning I got an email that is was corrected.