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State and Local Refunds Taxable Worksheet for Form 1040 in Lacerte

by Intuit•6• Updated 4 months ago

To find out how the taxable portion of state and local refunds is calculated:

Go to Screen 14.2, State Tax Refunds, Unemployment Comp.
Click on the State Refund Wksht in the left-hand navigation panel.
Mark the Itemized in prior year box.
- If this box has not been checked, state income taxes gave no tax benefit in the prior year; therefore the entire state tax refund is nontaxable
Additional entries on this screen are required to calculate the taxable portion of the state tax refund. See calculation below.

The worksheet is calculated as follows:

Line	Instruction	Input Field Name on Screen 14.2 or [Calculation]
1	State and local income tax refunds (prior year)	Income tax refunds, credits or offsets (2)
2	Refunds attributable to post 12/31/2023 payments per IRS Pub. 525	Refunds attributable to post-2023 ES/extension payments
3	Net state and local income tax refunds	[Add lines 1 and 2]
4	State and local taxes paid from prior year Schedule A, line 5	State and local income taxes paid
5	Prior year allowable sales tax deduction	Allowed or allowable general sales tax deduction
6	Excess of income taxes deducted over sales taxes	State and local income taxes paid less Allowed or allowable general sales tax deduction
7	Enter the smaller of line 3 or line 6	[Smaller of line 3 or line 6]
8	Itemized deductions from prior year Schedule A, line 17	Itemized deductions from Schedule A, line 17
9	Prior year recomputed itemized deductions, if state and local taxes were limited
10	Prior year base standard deduction	Base Standard Deduction
11	Prior year add'l standard deduction for age/blindness	Number of age/blind exemptions
12	Prior year total standard deduction	[Add lines 10 and 11]
13	Enter the larger of line 9 or line 12	[Larger of line 9 or line 12]
14	Subtract line 13 from line 8 (not less than 0)	[Line 8 minus Line 13]
15	Enter the smaller of line 7 or line 14	[Smaller of line 7 or line 14]
16	Negative taxable income (prior year)
17	Refund with no tax benefit due to AMT or non refundable credits	Refund with not tax benefit due to AMT, non refundable credits, or 0% capital gain or qualified dividend rate
18	State and local refunds taxable this year	[Add lines 15, 16, and 17]

You cannot force the State Refund Worksheet to generate if the State Refund is nontaxable.

For more information, please review the IRS instructions for Form 1040.

Details about Line 2, Refunds attributable to post 12/31/2023 payments

A state income tax refund must be included in federal income if the tax was deducted in an earlier year. This is considered a "recovery" (more information, Publication 525). In other words, if the payments that created this state refund provided a tax benefit on the federal return in the current year, then the refund may be taxable on the federal return in a subsequent year.

However, if you receive a refund or other recovery that is for amounts you paid in 2 or more separate years, you must allocate, on a pro rata basis, the recovered amount between the years in which you paid it.

The most common example of this is Estimated Tax payments. The due dates for the 2023 Estimated Tax Payments were:

Quarter 1: 4/15/2023
Quarter 2: 6/15/2023
Quarter 3: 9/15/2023
Quarter 4: 1/15/2024

If you received a refund for your 2023 state tax return, a portion of that refund needs to be allocated to the payment you made in the Quarter 4 estimate on 1/15/2024. This is what is reflected on Line 2 of the taxable state refund worksheet.

Lacerte does this by finding the percentage of your total payments that the Quarter 4 estimate reflected and then multiplying that by the refund amount.

For example, assume the following Tax Payments for the 2023 tax return:

Withholding on Wages: $5,000
Quarter 1 Estimate: $300
Quarter 2 Estimate: $300
Quarter 3 Estimate: $300
Quarter 4 Estimate: $500

The total payments is $6,400. The quarter 4 estimate is the only amount outside of the 2023 tax year, so the percentage is determined by: $500 / $6,400 = .078125, or 7.8125%

If the 2023 state tax refund was $200, then Lacerte would calculate: $200 * .078125 = 15.625, giving us $16 for Line 2, Refunds attributable to post 12/31/2023 payments.

More information and examples regarding this type of recovery is available in Publication 525

Lacerte Tax

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