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Wolf Harper
Lv 6
Wolf Harper asked in Business & FinanceTaxesUnited States · 1 decade ago

How do I reduce the state tax refund I must pay Feds?

Last year, my state withheld $3000 for income tax.

Last year I itemized my Federal tax on Schedule A. I was allowed to deduct $3000 of state income tax. However, I only deducted $2000. There was an extra $1000 I was entitled to deduct, that I did not.

I got a $1000 tax refund check from the state. THey also sent me a 1099-G for $1000.

I don't believe I need to report that as income, since I did not benefit from the tax deduction last year -- I deliberately did not take that extra $1000.

How do I put that in the paperwork? In case the IRS audits?

Update:

Withholding and amending prior tax don't work for me. Too much of my income was withheld at a fixed, high rate I could not change. Believe me, I tried, and how!!!

I also tried amending my prior year tax. This did not work, for reasons which are outside the scope of this question and please don't go there, stay focused on the question at hand. (it's AMT, and yes I tried AMT recovery but I may have messed it up.)

For what it's worth, I cannot find any LAW (statute: Title 26) that calls for this "Deduct withholding, declare refund as income" thing. It appears to be an IRS tax procedure.

http://www.law.cornell.edu/uscode/html/uscode26/us...

All roads seem to lead to double taxation on this $1000. Any ideas?

How would I argue "I did not take the deduction last year, so I did not benefit from the refund"?

Update 2:

I DO have an argument to the contrary. I shouldn't be taxed twice on the same money. That's a basic principle of fairness. I've talked to over a dozen people at the IRS, and they all seem to think the same thing. Nobody has said double taxation is proper, they all say "There's gotta be a way to resolve that" but none of them know exactly what form I fill out. Even a guy at the IRS's AMT office was stumped. I was hoping the YA community would have some answer, and I know it's a tough question and I thank people for their best effort.

6 Answers

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  • Anonymous
    1 decade ago
    Favorite Answer

    Adjust your withholding so you get a lower refund. You deduct what you paid not what the tax due on the return was and the refund gets undeducted the next year.

  • Bostonian In MO
    Lv 7
    1 decade ago

    Since you itemized, the state refund is taxable income. No way around that.

    Since you didn't claim the proper amount on your federal return, you'll have to amend that return to correct that. You'll get a few dollars back by doing that, so it generally would be worth doing.

    Edit: Sorry, but by your own admission you deducted state income taxes the prior year. The fact that you didn't deduct all that you paid is irrelevant. Since you got a $1,000 refund of state income taxes paid, your deduction was $1,000 high. That makes the tax refund taxable the following year. End of story. You have no argument to the contrary.

  • ?
    Lv 7
    1 decade ago

    You have a worksheet in the 1040 instruction book page 21 that you have use for this the purpose of determining the amount of your state income refund that you will have to report as taxable income for the 2010 tax year.

    State and Local Income Tax Refund Worksheet—Line 10 Keep for Your Records

    http://www.irs.gov/pub/irs-pdf/i1040.pdf

    Since you used the schedule A for the 2009 tax year once you complete this worksheet you will know if you have to report the refunded 1000 amount as taxable income in the tax year 2010 on your 1040 page 1 Line 10. Taxable refunds local income tax, etc. 10. $$$$ amount.

    Hope that you find the above enclosed information useful. 05/04/2011

  • Eric
    Lv 6
    1 decade ago

    Sorry, but that won't work. If you itemized the year before, your state refund is taxable. They don't care if you didn't take full advantage of what you could have gotten. You did yourself a disservice by not claiming all that you could, but you could still amend and get that extra few bucks.

  • ?
    1 decade ago

    Your tax software should do the the calculation for you (how much of your prior year state tax refund is taxable in the current year). If you enter your prior year state tax refund and also your prior year itemized deduction information into the tax software, it will do the calculation for you.

  • tro
    Lv 7
    1 decade ago

    you probably need to document your procedure to the IRS by indicating that you did not benefit by the $1000 you received as a refund

    this method only makes matters more confusing and is not a good idea to use in your preparation

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