State Tax Refund - How to Enter in ProSeries

[troy]

If a taxpayer had a state tax refund but rolled it forward and did take the check, how does this figure get entered in terms of calculating the taxable portion of the refund?

[IRonMaN]

Did they itemize in the prior year?

[troy]

Yes, but never received any refund, rolled it all forward.

[IRonMaN]

Actually, they did receive a refund and then took those proceeds and in effect wrote a check to the state

[troy]

I am having trouble locating where in the software it does this automatically, assuming you rolled forward from a prior year ProSeries file.

[IRonMaN]

There is a tax refund worksheet in the software 

[Jim-from-Ohio]

also shows up on the carryover worksheet

[troy]

I am confused as to whether ProSeries is automatically calculating this or not. 

I navigate to the prior year ProSeries file on the Recovery Exclusion worksheet.

I then enter the state refund amount in Part 3.

After that, I check the box to compute Parts II, III, and IV.

When I obtain the numbers from the applicable row, column "D" and "E," I enter those in the 2023 software (there is no number calculated in column "E" so I am really just entering the Regular Tax from column "D")

These steps are not changing the taxable amount in 2023 despite itemizing and receiving a refund in 2022.

Does it have anything to do with state income taxes paid now being capped at $10k?

[IRonMaN]

"Does it have anything to do with state income taxes paid now being capped at $10k?"

Yes, that does affect things.

[qbteachmt]

"assuming you rolled forward from a prior year"

There is no "roll" provision tax shelter. That's more of a banking option, not tax action. This option doesn't affect the taxable status. If they itemize, that means they took their tax expense as a deduction. When you end as overpaid, the overpayment is recaptured as a source of income. It doesn't matter that they didn't get the difference in their hands.

[troy]

My basic understanding is if you subtract the state refund from the itemized deductions, and the itemized deductions are the same (due to the SALT cap), then there is no tax benefit, thus it isn't taxable.

The confusing part is the state is going to issue a 1099 regardless.

[qbteachmt]

"The confusing part is the state is going to issue a 1099 regardless."

That's got nothing to do with if the money is applied to the next year or refunded. One is the banking. The other is the taxable status.

It's a refund of an amount overpaid; and if it was an itemized deduction for the year paid, it also was over-deducted. It's still taxable, but what you are describing is like the refund amount is offsetting another credit that is so large, the taxable amount is fully applied.

The money still is the taxpayer's to determine how to use it.

[troy]

If they issue a 1099, but the itemized deductions would not change had they paid into the state evenly (instead of receiving a refund), then the 1099 should not be taxable, as I understand it.

[qbteachmt]

It isn't clear if you think "receiving a refund" is what changes the taxable status. Let's think of it as "entitled to a refund" and then they get to decide what to do with the money: "receive it" = get it sent to them; or, "roll it" = let the agency treat it as applied to the next cycle for what they would have paid from their own bank account.

Nothing here changes if it is taxable to them. That determination is made by using the lookback to the year the refund is from. If they itemized in that year, they deducted too much (because they clearly paid too much) and this refund is treated as the opposite of deduction = income for the year received.