D. Stussy wrote:
- quote -

I agree that makes sense, but only in proportion to the
total tax deducted, as I surmised.

TT seems to be following the example given in IRS Pub 525
(p.20) for "a refund [...] that is for amounts you paid in 2
or more separate years". And looking at the TT worksheet
more carefully, I believe it confirms what I had surmised in
my original posting. The TT worksheet has several columns
(using my hypothetical numbers):

Line 1:
(a) State or Local Code: CA
(b) Refund Amount: $500
(c) Estimated Tax Paid After 12/31/2004: $0
(d) Extension Payments: $300
(e) Total Payments and Withholding: $10,000
(f) Refund allocated to colulmn (c): $0
(g) Refund allocated to column (d): $15

Line 2: Total state and local refunds (column b): $500
Line 3: Refund allocated to tax paid after 12/31/2004
(total of columns f and g): $15
Line 4: Net refund (line 2 less line 3): $485

As the IRS Pub example explains, only $485 is considered
income for 2005 (because I reported it as a deduction in
2004).

The remaining $15 refund would reduce any 2004 estimated tax
that I paid in 2005 and might report as a 2005 deduction,
according to the IRS Pub example.

But apparently it does not reduce any 2005 state income tax
paid in 2005, and apparently I do not need to remember and
record it as some kind of carryover in 2006, as I was
worried about. At least, IRS Pub 525 says nothing like
that, as I interpret it.

Moreover, the IRS Pub explanation confirms my suspicion that
I must explain the "disparity" with the 1099-G. It
explains: "[A]ttach a copy of your computation showing why
the amount is less than the amount shown on the Form
1099-G".

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joeu2004[at]hotmail.com wrote:

- quote -

To see what is going on, read the Line 10 instructions in
the 1040 instruction book and also review the worksheet on
page 24.

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joeu2004[at]hotmail.com wrote:

- quote -

Reasons:

1) When subtracting the amount of the refund from the total
of Schedule A, the result is less than your allowed standard
deduction.

2) Your income was high enough that Schedule A had the
special computation for phasing out and reducing its total.

3) You were subject to the Alternative Minimum Tax in the
prior year.

4) It is smart enough to know that a payment and refund in
the same year cancel out each other.

Choose the answer(s) that best fit(s) your situation.

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joeu2004[at]hotmail.com wrote:

- quote -

No. For 2004 you itemized deductions and used the state
income tax instead of the sales tax as your deduction. Only
the difference between what you could have claimed (sales
tax) and what you did claim (income tax) is considered a
taxable recovery, so if that is less than your refund, the
number will not match your full amount on 1099G.

- quote -

No.

-Mark Bole

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<joeu2004[at]hotmail.com> wrote

- quote -

The amount of the state tax refund can not exceed the amount
of your itemized deductions greater than the standard
deduction in that prior year. So, with a standard deduction
of say $5000, itemized deductions of say $6000, and a $1200
state tax refund - only $1000 of your $1200 refund would be
included in income in the year the refund was received.

--
Paul A. Thomas, CPA
Athens, Georgia

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TurboTax determines that the taxable part of my state tax
refund for 2004 is less than the amount shown on the 1099-G.

I am guessing that TT deducted the portion of the 1099-G
refund attributable to an amount that I had paid in with my
2005 extension to cover what I had (incorrectly) estimated
then to be an underwithholding of total tax liability. For
example, using hypothetical numbers, if my withholding plus
extension payment were $10,000 and the extension payment
were $300 and the refund were $500, TT would compute the
taxable refund for 2005 to be $485 = 500 * (1 - 300/10000).

Does that sound right?

I cannot find a complete explanation in TT, but the above
computations matches the ones that TT shows in a worksheet.

I assume that I would come to the same conclusion if I were
to grind through the computation in Pub 525, following
exception 5 in the 1040 instructions for Line 10. Of
course, the whole point of using TT is so that I do not have
to do the labor myself.

My questions are (using the hypothetical numbers above):

1. If I report only $485 as taxable refund income in 2005,
will the remaining $15 need to be reported as taxable refund
income in 2006? (I assume "yes". I cannot find the answer
in TT.)

2. Is there any disadvantage to reporting $485, which
differs from the 1099-G amount? For example, without
further explanation in a statement attached to my 2005 tax
return, would this apparent "disparity" cause the IRS to
issue a "correction", which I would then need to explain or
appeal?

This is the first time I am using TT (or any tax software)
to do my return. I don' t know if TT will include a
statement to explain the apparent "disparity". (I will be
printing my tax returns, not using e-File.)

3. Although #1 would be to my advantage, even if the $15
carries over to 2006 income, when my tax rate will be
__much__ lower, for the pitance of tax savings on $15 in
2005, I am tempted to report the full $500 on the 2005
income tax return and be done with it.

Would __that__ cause the IRS to issue a "correction",
perhaps because their own calculations would follow the
worksheets in Pub 525 and compute the same lower 2005
taxable income that TT did?

I really am looking for the easiest approach, not
necessarily one that results in the least tax (unless it is
also the easiest). I don't care about the extra hypothetical
$5 in taxes ;-).

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