STATE REFUND

[HOPE2]

Hi to all.

The IRS said: 

Most taxpayers receiving state tax refunds do not have to include the state tax refund in income for federal tax purposes. As a general rule, taxpayers who choose the standard deduction on their federal income tax returns do not owe federal income tax on state tax refunds.
The vast majority of taxpayers claim the standard deduction. For instance, in tax year 2021, 90% of individuals claimed the standard deduction instead of itemizing their deductions.

Taxpayers who itemize their deductions on their federal income tax returns and receive a state tax refund must include the refund in income only if they deducted the state tax paid. Because of the $10,000 limit on itemized deductions for state income and property taxes, some itemizers are not able to deduct all of the state taxes they paid and do not need to include a refund in income.

For me it is confusing and need a help please. What I understood, if line 5d more than $10000 for anyone, but ; since line 7 on Schedule A can not be more than $10000 (limitation for itemizer) so state refund is not included as FED income. For all other people use Standard is not FED income as well.

[Just-Lisa-Now-]

Theres a state refund worksheet to determine if the refund is taxable or not. 

ProSeries does a pretty good job picking this up automatically if you prepared the prior year return, if you didnt, then theres a worksheet you can plug the prior year 1040 and Sch A figures into and it will compute any taxable state refund for you.   I find it easiest to locate that worksheet from the Where do I Enter button, once youre in the worksheet, scroll down just a little way and you'll find the 2021 1040 smart worksheet that asks about the 2021 1040 line items to compute any taxable state refund amount.

[qbteachmt]

"For me it is confusing"

I describe it like this:

If they got the benefit of their State tax payment(s) as a "write off" (deduction) and then later get some of it back as refund, they need to claim the refund as taxable income, because they had previously written it off as deduction. You can't take a deduction and when it is returned to you, ignore that fact. That is a free ride, in other words. If you didn't declare it for purposes of a write off, then any refund is not reportable, because you never reported the paying of it as a tax deduction in the first place.

So, if you use the State payment to your benefit (a deduction) in Federal tax filings, you need to report that you got some of it back (report as income), when that happens. If you use the Federal payment in State tax filings (deduction), and you get some of it back, you need to report that as taxable income. If you don't use any amount for deduction purposes, then you don't report any refunds, either.

[HOPE2]

Hi @lisa. Thanks for your help

I checked that worksheet but it was incorrect because part1 table 1 column(b) is the amount of refund + estimated payment of 2021 which came in to 2022, but the real refund is less than this amount so line 4 is not correct. Also, if the client did have 1040-X or Schedule X , Proseries did not carryover the refund which generated after Amended. By the way, what line on that worksheet shows the refund as FED income?

Also, I discovered the amount of state refund on 1099-G line 2 which automatically generated , is not correct. It is (Net refund + estimated payment )

[Just-Lisa-Now-]

It didnt carryover the correct amount of refund due to an amended return?  Are you sure that amended refund was received in that tax year?  Did the total refund match what was on the 1099g for 2021?  I guess its possible you may have to adjust things on the Carryover worksheet.

Its hard for me to follow without it all on the screen in front of me, sorry.

[HOPE2]

Thanks @lisa, I will post here some screens soon, but let me know what line of that worksheet shows FED income for State refund please?

[HOPE2]

Thanks, I read it many times but I need numbers to understand about write-off or deduction. Let's have Schedule A's numbers as example when the write-off or deductions happen while consider $10000 limit please.