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Posted by Gil Faver on April 28, 2007, 5:03 pm
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I can run the worksheets, with a bit of effort, but the
result does not seem to match the premise.
As I understand the premise, a tax refund is taxable to the
extent it provided a tax benefit in a prior year. So it
seems that to the extent the tax was not used to provide a
tax benefit due to limitations on Schedule A itemized
deductions, the tax refund should not be treated as income
when it is received in a subsequent year.
However, the State and Local Tax Refund Worksheet does not
seem to take into account the extent to which a tax was not
allowed to be used as a Schedule A deduction.
Here's an example (simplified, may not work precisely with
IRS worksheet):
Prior year total deductions: $54,000
(taxes=$45k; other=$9k)
prior year allowed deductions: $45,000
disallowed deductions due to limitation: $9,000
this year's tax refund: $13,000
amount of this years tax refund that is taxable: $13,000
why is it not, at most, say $4k?
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Posted by Benjamin Yazersky CPA on April 30, 2007, 11:41 am
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> I can run the worksheets, with a bit of effort, but the
> result does not seem to match the premise.
>
> As I understand the premise, a tax refund is taxable to the
> extent it provided a tax benefit in a prior year. So it
> seems that to the extent the tax was not used to provide a
> tax benefit due to limitations on Schedule A itemized
> deductions, the tax refund should not be treated as income
> when it is received in a subsequent year.
>
> However, the State and Local Tax Refund Worksheet does not
> seem to take into account the extent to which a tax was not
> allowed to be used as a Schedule A deduction.
>
> Here's an example (simplified, may not work precisely with
> IRS worksheet):
>
> Prior year total deductions: $54,000
> (taxes=$45k; other=$9k)
> prior year allowed deductions: $45,000
> disallowed deductions due to limitation: $9,000
> this year's tax refund: $13,000
>
> amount of this years tax refund that is taxable: $13,000
>
> why is it not, at most, say $4k?
First of all, please do not confuse logic or common sense
with tax simplification.
You have to allocate the disallowed itemized deductions to
the various categories of itemized deductions claimed in the
previous years. Determining just how much benefit the state
& local tax deduction may require reruning the tax return
several times with different sets of numbers to find out how
much of the state & local tax deduction actually provided a
benefit. The IRS may have a publication on topic.
___________________________________
<<< Benjamin Yazersky, CPA [NJ & NY] >>>
-----> real address on hobokeni or hobokenx <-----
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ------------------------------------------------------- >>
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Posted by Bill Brown on April 30, 2007, 11:41 am
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> Here's an example (simplified, may not work precisely with
> IRS worksheet):
>
> Prior year total deductions: $54,000
> (taxes=$45k; other=$9k)
> prior year allowed deductions: $45,000
> disallowed deductions due to limitation: $9,000
> this year's tax refund: $13,000
>
> amount of this years tax refund that is taxable: $13,000
>
> why is it not, at most, say $4k?
Because you didn't do it right.
Try this shortened form:
Itemized deductions actually taken: $54,000
Greated of itemized deductions if only actual state tax
had been deducted, or standard deduction: $41,000
Tax Benefit: $13,000 ($54,000 - $41,000)
Taxable state refund: $13,000
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ------------------------------------------------------- >>
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Posted by Bob Sandler on April 30, 2007, 11:41 am
Please log in for more thread options > I can run the worksheets, with a bit of effort, but the
> result does not seem to match the premise.
>
> As I understand the premise, a tax refund is taxable to the
> extent it provided a tax benefit in a prior year. So it
> seems that to the extent the tax was not used to provide a
> tax benefit due to limitations on Schedule A itemized
> deductions, the tax refund should not be treated as income
> when it is received in a subsequent year.
>
> However, the State and Local Tax Refund Worksheet does not
> seem to take into account the extent to which a tax was not
> allowed to be used as a Schedule A deduction.
>
> Here's an example (simplified, may not work precisely with
> IRS worksheet):
>
> Prior year total deductions: $54,000
> (taxes=$45k; other=$9k)
> prior year allowed deductions: $45,000
> disallowed deductions due to limitation: $9,000
> this year's tax refund: $13,000
>
> amount of this years tax refund that is taxable: $13,000
>
> why is it not, at most, say $4k?
You're right. The State and Local Income Tax Refund
Worksheet does not take into account the itemized deduction
limitation. That's why you can't use that worksheet if your
itemized deductions were limited in the previous year.
Exception 9 in the instructions above the worksheet in the
1040 instructions tells you this in a very complicated way.
See the section on Recoveries in IRS Publication 525, and
particularly the topic "Itemized deductions limited"
beginning at the bottom of page 24 (of the 2006 edition).
There is no worksheet for this situation. To calculate the
amount that has to be reported as income you have to follow
the instructions in the text at the bottom of page 25.
Bob Sandler
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ------------------------------------------------------- >>
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Posted by parrisbraeside@yahoo.ca on April 30, 2007, 11:41 am
Please log in for more thread options
> I can run the worksheets, with a bit of effort, but the
> result does not seem to match the premise.
>
> As I understand the premise, a tax refund is taxable to the
> extent it provided a tax benefit in a prior year. So it
> seems that to the extent the tax was not used to provide a
> tax benefit due to limitations on Schedule A itemized
> deductions, the tax refund should not be treated as income
> when it is received in a subsequent year.
>
> However, the State and Local Tax Refund Worksheet does not
> seem to take into account the extent to which a tax was not
> allowed to be used as a Schedule A deduction.
>
> Here's an example (simplified, may not work precisely with
> IRS worksheet):
>
> Prior year total deductions: $54,000
> (taxes=$45k; other=$9k)
> prior year allowed deductions: $45,000
> disallowed deductions due to limitation: $9,000
> this year's tax refund: $13,000
>
> amount of this years tax refund that is taxable: $13,000
>
> why is it not, at most, say $4k?
Because you were allowed $45,000 in itemized deduction and
there state tax credit in the itemized deductions was
$45,000. They just disallowed the other 9,000.
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ------------------------------------------------------- >>
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