State over-withheld; AMT took it. How do I recover this year?

Question

Last year, I was in a situation where too much state income tax was withheld.  For demo numbers: $3000 was withheld, $2000 was my actual tax, the refund is $1000. 

YES, I DID adjust my W-4.  It was maxed out; 0 taxes were being withheld.   It wasn't enough.  Too much of my income was non-salary, but reported like salary (NQSO), and the payer absolutely insisted on withholding at a high fixed rate. I tried.  DEAR GOD I TRIED.   

I gave over half my income to charity.  Go me.  That is why my withholding is too high.  They say no good deed goes unpunished! 


I itemized my deductions and took the state income tax on line 5.  When I put in $2000, everything worked correctly.  When I put in $3000, the extra $1000 triggered AMT; and so I did not get the benefit of that deduction. 

Now the state sent me a 1099-G for the $1000 refund.  I've gone through every IRS form and publiciation I can lay my hands on, many of them have informal worksheets.    Maybe I'm doing them wrong, but all of them seem to say I have to declare the $1000 as income (1040 line 10) and pay tax on it A SECOND TIME.  

That's double taxation.  I'll literally be paying the 28%-ish tax on it twice.  

How do I get out of that?

tro · Accepted Answer

this post was responded to before, was it deleted or you didn't like the answers?
when you file for 2011 you can claim the amount of state income tax on Sch A that you had to pay
if you are trying to avoid claiming the $1000 as income for the 1040, you need to prove to IRS that you did not have the tax advantage of that $1000 on your 2010 Sch A

Slickterp · Answer

You DO have to declare it as income.  You took the deduction, you declare it as income.  Period.

You DID NOT pay tax on the $1000 the first time.  It was tax you paid that was refunded to you.

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State over-withheld; AMT took it. How do I recover this year?

2 Answers