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Posted by Bill Brown on April 12, 2006, 11:28 pm
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davesvideo@aol.com wrote:
> In 2004 while no longer MD residents, what had been our
> primary residence was sold and should have been exempt from
> Capital Gains. However, due to some new regulations that the
> settlement attorneys did not understand, an amount of about
> $16K was taken from the sale. After many calls to MD tax
> offices, we were advised that the best course was to file a
> MD nonresident return for 2004: MD income = 0, Tax withheld
> = 16K, Refund due = 16K, and the money was finally refunded.
>
> The problem is, this refund has been reported to the IRS as
> 2005 income. It appears that one way to deal with this would
> be to file an amended Federal form for 2004 and claim an
> additional $16K deduction to balance out the added income on
> the 2005 tax. Hopefully, the refund from 2004 would more or
> less equal the additional 2005 tax. But, is there any more
> simple way to handle this. We were just getting back
> wrongfully withheld funds and never thought of including it
> on the 2004 Federal forms.
Yes, a more simple way to handle it is to not report any
state tax refund income on your 2005 return (except for any
refunded amount you actually deducted in '04). Show a zero
on the appropriate block of Form 1040 and write "Tax Benefit
Rule" in the space to the left of the amount block.
Good luck.
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