State/Local Income Tax Refunds Form 1040 Line 10 Pub 4491 Part 3 Lesson 9 Pub 4012 Page D 12
Recoveries In a prior year, you Paid an expense, and Deducted the expense, and Your taxes were reduced. In current year You received a refund or reimbursement of the expense. 2
Recoveries The refund or reimbursement is taxable To the extent the taxes were reduced 3
Recoveries Most common occurrence is state or local tax refund See Line 10 Other recoveries Line 21 4
The Interview Point of awareness From 2016 returns 5
State/Local Income Tax Refunds Form 1099-G State or local income tax refund 2016 only 6
State/Local Income Tax Refunds Interview Must have 2016 return if not all taxable Box 3 must be 2016 (not older years) Exceptions: If taxpayer agrees 100% taxable If taxpayer claimed standard deduction for all years (0% taxable) If taxpayer claimed sales tax deduction for all years (0% taxable) 7
TaxSlayer Worksheet Enter refund Enter total itemized deduction Enter income taxes withheld or paid Enter sales tax that COULD have been deducted 8
State/Local Income Tax Refunds Tax benefit rule: Taxable in year received if it gave tax benefit in year deducted Taxable amount is limited to amount that gave tax benefit 9
No Tax Benefit Tax benefit rule: No benefit if standard deduction was used in 2016 No benefit if Sales Tax was deducted in 2016 No benefit if negative taxable income (Line 41 minus line 42) when stated as a positive number is more than the amount of the refund 10
No Tax Benefit? Take no action in TaxSlayer. Note not taxable and why on the intake sheet. 11
Itemized Versus Standard Deduction Look at 2016 Form 1040 Page 2 Line 40 Taxable amount is limited to the difference between Line 40 and standard deduction amount 12
Income Tax Versus Sales Tax Look at 2016 Schedule A Line 5 Taxable amount is limited to difference between income tax claimed and sales tax that COULD have been claimed. 13
Calculate Sales Tax Take AGI from 2016 F1040 Line 37 Add income not taxed (e.g. non-taxable SS, SSI, VA benefits) Go to Schedule A instructions, look up your state in sales tax tables for number of exemptions on 2016 return Input in worksheet 14
TaxSlayer Worksheet Must have 2016 federal return! TaxSlayer asks several questions Answer them with info from 2016 return Open Page D-12 15
Possible Tax Benefit? TaxSlayer s worksheet checks against sales tax amount and standard deduction. 16
Negative Taxable Income Negative taxable income on Page 2 of 2016 Form 1040: Line 41 (1,234) Less line 42-8,100 Total negative taxable (9,234) income Taxable amount is limited to amount refund exceeds the negative taxable income (as a positive). 17
Unused Tax Credits in 2016 Confirm if there were unused tax credits look at 2016 tax return Was tax after nonrefundable credits (Line 56) zero? If so, there are probably unused credits. 18
Unused Tax Credits in 2016 Determine amount of unused credits Determine amount of additional income that creates tax equal to credits Taxable amount is limited to difference between this income and refund amount. 19
TaxSlayer Worksheet If there were Unused tax credits State estimated payments (2017) Other recoveries Go to worksheet at cotaxaide.org/tools Enter results here 20
COTaxAide.org/tools Answer all questions Results will be here 21
State Tax Refund Worksheets Most common error: forget to input sales tax that could have been deducted 22
Quality Review State/Local Income Tax Refunds Confirm tax refund was only for 2016 Review prior year s return Itemized? Income tax deducted? Negative taxable income? Any unused credits? Review entries in state tax refund worksheet 23
State and Local Income Tax Refunds TaxSlayer carries taxable portion of state and/or local income tax refund to 1040 Pg 1 Line 10 24
Taxpayer Summary State/ Local Income Tax Refunds Show taxpayer portion of refund that is taxable, if any 25
Example of Other Recovery Taxpayer paid hospital bills in 2016 and deducted them on Schedule A. Insurance reimbursed those expenses in 2017. Taxable amount of reimbursement (amount which created a prior year tax benefit) goes on Line 21. 26
State And Local Income Tax Refunds Questions? Comments 27