"Rich Carreiro" <rlcarr[at]animato.arlington.ma.us> wrote:

- quote -

I stopped reading after fact 1. Bottom line, if the refund
is due to payments made in the second year, reduce the
reportable refund by that amount. If any portion is not
taxable due to AMT in the prior year, then so be it.

--
David M. Woods, EA, ChFC, CLU
Woods Financial Services
Norwood, MA 02062
www.woods-financial.com

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Phil Marti <prm20871[at]verizon.net> wrote:

- quote -

Just curious, do popular tax softwares perform the above
allocation automatically? (Assuming you've entered in
all the payment dates.)

Steve

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"Rich Carreiro" <rlcarr[at]animato.arlington.ma.us> wrote:

- quote -

You figure out what percentage of his tax year 2004 payments
to the state were made in 2004 and 2005. You apply that
percentage to figure out what part of the refund is 2005
income and which part reduces the 2005 Schedule A deduction.
See Pub 525.

As for AMT, that is blissfully beyond my pay grade.

--
Phil Marti
Clarksburg, MD

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The scenario:

* In April 2005, taxpayer computes his best estimate of
what his 2004 state income tax will be, based on his
incomplete records. The return is clearly in a
balance due situation. For the sake of concreteness,
say that the estimated tax liability is $5000 and he
had $3000 withheld.

* TP puts his state return on extension and with the
extension submits a payment for the estimated balance
due plus a bit extra to cover if the estimate turns out
to be too low -- so he sends in a check for $2200 with
the extension request.

* When TP finally has all his records and can complete
the finished return, he discovers that the actual state tax
liability would have resulted in a balance due relative
to his 2004 withholding but now results in a refund
once the payment with extension is figured in. So
pretend the actual return shows a tax liability
of $4700.

* TP receives his refund (here $500) later in 2005
and in Jan 2006, the state sends him 2005 1099-G
for the $500.

* It's now March 2006 and the TP is about to prepare
his 2005 federal return.

* TP itemized on his 2004 federal return and will be itemizing
on his 2005 federal return.

The questions:

(1) Since the $2200 state tax payment with the extension and the
$500 refund both happened in 2005, can the TP simply net them
and report state taxes of $1700 plus what was withheld in 2005
on his 2005 federal return and not report (or report and subtract back)
the $500 shown on the 1099-G?

(2) If he can't do (1), can he not report the $500 on his 2005
return because the refund was *not* due to a 2004 overpayment --
he got no 2004 tax benefit from the overpayment; after all,
the overpayment was made in 2005. If so, how does he report
the $2200 paid with his extension? Surely he doesn't get
to double-dip on the $500.

(3) Or his he stuck including the $500 as income and taking the
incremental $2200 deduction even though he didn't overpay
his taxes in 2004?

(4) And how do the answers change if in 2004 he was far enough into
the AMT that the $500 in state taxes would have left his
fed tax liability unchanged?

(5) Or in the AMT not in 2004 but in 2005?

(6) Or in the AMT both years?

(7) And if any answers involve not reporting the $500 as income,
presumably he'd get a nastygram from the IRS about not
reporting that $500. What would be the response -- an
explanation of the reason for the refund and a statement
of that being why it wasn't reported (and documentation
to show it was the extension payment that caused the refund
and not the original 2004 withholding)?

--
Rich Carreiro rlcarr[at]animato.arlington.ma.us

<< ================================================== ===== > << The foregoing is intended for educational purposes only > << and does NOT constitute legal OR professional advice. > << > << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org. > << Copyright (2005) - All rights reserved. > << ================================================== ===== >