On Jan 2, 8:35*am, Bob Taylor <nos...[at]nomspam.com> wrote:
- quote -

I was surprised as you were and thought that I'd entered something
wrong. But after looking at the input very carefully I'm convinced
TaxCut has the right information. It knows I didn't itemize last
year, it knows I'm itemizing this year, it knows I paid my last state
estimated tax for tax year 2007 in 2008 and it knows I got a refund in
2008 on my 2007 state tax return. I just don't think it's missing
anything to come to the right conclusion about my situation.

I tried 3 times via "chat" to discuss this with TaxCut but the
customer reps (3 different) all insist that TaxCut is right and I
don't have to recognize any portion of the tax refund. The reps are
clearly program-oriented and not "tax" oriented. I was told "tax"
folks would be available after January 5 and I may try again at that
time.

Tom Young

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TomYoung wrote:
- quote -


- quote -

1. I don't know anything about TaxCut but am surprised if it cannot
handle this situation correctly. It is far too common and basic to be
overlooked. I suspect you may not have given it all the information
it needs in the correct places.

2. I wouldn't blame the IRS or their poorly worded instructions. I
think actually they do a pretty good job. But it is very hard to
document a mess, which is what the tax system is. The people to blame
are the arrogant and ignorant people who write the laws.


Regards, Bob Taylor
..

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On Dec 24, 4:42*pm, Bob Sandler <bob_use...[at]yahoo.com> wrote:
- quote -

Bob:

Thank you. I must say I was getting exhausted reading poorly-worded
IRS instructions and publications (Form 1040 Instructions Publication 17 > Publication 525) and gave up a bit too soon.

Tom Young

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- quote -

TurboTax is right.

The refund you received in 2008 is partly a refund of what
you paid in 2007 and partly of what you paid in 2008. The
part of the refund attributable to what you paid in 2007 is
not taxable income because you didn't take an itemized
deduction for state taxes in 2007. That's why there is
nothing on Form 1040 line 10. But the part of the refund
attributable to your January 2008 estimated tax payment
reduces your deduction for 2008. You can't deduct the entire
estimated tax payment because you got part of it back in the
same year.

You need to read a little further in Pub. 525. The following
is on the next page after the paragraph that you quoted.

"Recovery for 2 or more years. If you receive a refund or
other recovery that is for amounts you paid in 2 or more
separate years, you must allocate, on a pro rata basis, the
recovered amount between the years in which you paid it.
This allocation is necessary to determine the amount of
recovery from any earlier years and to determine the amount,
if any, of your allowable deduction for this item for the
current year."

This is followed by a lengthy example in which the amount
allocated to the current year, in which the January
estimated tax payment was made, reduces the deduction for
state taxes paid in the current year.

Bob Sandler

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Hi all:

I took the standard deduction in my 2007 Federal income tax return.
In 2008 I will itemize.

In January, 2008 I paid my 4th quarter estimated state income taxes,
but I got a refund of state income taxes after filing in April.

Grinding this information into TurboTax along with all the other
income/adjustment/deduction items results in TurboTax reducing by a
small amount the state income tax deduction I would otherwise expect.
That is, there's no entry on line 10 of my 2008 Form 1040 but there's
a reduction of the amount of state income taxes I paid in 2008 on line
5 of Schedule A.

Doing the same exercise in TaxCut results in TaxCut declaring that no
portion of the refund is taxable. No entry appears on line 10 of Form
1040 and there's no reduction of state income taxes I paid in 2008 on
line 5 of Schedule A.

Naturally, I like TaxCut's answer more that TurboTax's, but I have a
feeling that TurboTax's answer might be the right one. There's a
certain logic to reducing a deduction in the year you both pay
deductible state income taxes and receive a state income tax refund
for the same tax year, but I know "logic" and "taxes" are words you
don't use in the same sentence very often.

I went looking through the Form 1040 instructions, Publication 17 and
Publication 525 and I still can't quite get a firm answer. The
nearest comprehensive answer I found was this one in Pub 525:

"Tax benefit rule. You must include a recovery in your income in the
year you receive it up to the amount by which the deduction or credit
you took for the recovered amount reduced your tax."

All the examples and verbiage in Pub 525 speak to recoveries in the
current tax year vs. deductions in the prior tax year but the rule as
stated above doesn't really require this "2 different years"
situation. That is, I get a benefit in 2008 for paying 2007 state
taxes so the recovery in 2008 of 2007 state taxes has to be
recognized, to a certain extent.

Is my thinking about this correct? Does TurboTax have the right
answer in my situation, or am I mis-understanding the tax benefit rule
and TaxCut has got it right?

TIA.

Tom Young

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<< ------------------------------------------------------- > << 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 (2007) - All rights reserved. > << ------------------------------------------------------- >