[net.taxes] More on state income tax

drv@eisx.UUCP (Dennis Vogel) (02/28/84)

I'm getting confused on this business about declaring
state tax refunds as income in the following year.
What I think I'm hearing is that if I overpay my tax
through state witholding (on money that I have already
payed federal tax on for the year it was earned) and get
a refund of my overpayment it should be declared as income.
Unless I'm not figuring it right, I was already
taxed on it once, wasn't I?  I just sent some money to
the state to hold for me in anticipation of the tax I
would owe.  (Not by choice, mind you.  The state like
the feds like us to pay-as-we-go.)  Why should I have
to treat as income money that is rightfully mine and has
already been taxed once as income?  Someone please explain
what's going on here.

Dennis Vogel, AT&T Information Systems Labortories

wetcw@pyuxa.UUCP (T C Wheeler) (02/28/84)

Maybe this will help, I don't know.

 us say that your total income was $1000 in 1982.  Now, in order to
reduce your taxes, you take a deduction for your State taxes.  Let's
say you paid, through payroll deductions, $200 in state taxes.  Remember,
you haven't figured your State tax yet.  On your Fed form 1040, you take
a State taxes paid deduction of $200.  This reduces your total income
to $800.  You pay your taxes on this amount to the Feds.  Now, you figure
out what your State taxes are supposed to be.  You find out you overpaid
by $100 and will get a refund of $100.  What the Feds are saying is that
the $100 refund should be added to your income for this year to make
up for taking too much in deductions last year.  See, when you paid your
taxes for 1982, you only paid on $800.  The correct deduction for that
year should have been $100, not $200, and taxes should have been paid
on $900.  The one good side of all this is that you are not penalized
for figuring your taxes this way, as long as you add the refund back
in next year.

Now, for how to avoid this hassle in the future.  Simply do your State
taxes first and take the actual amount paid as the deduction on you
Fed form.  Thus, if you claim $100 in State taxes, and get a refund
from the State, the refund is already accounted for in your total
income because you did not reduce the total by the amount of the
refund.  If you use the actual amount of State taxes paid, there
is no trying to figure out what the amount of the damn refund was
if your records get lost.  

T. C. Wheeler

ishizaki@saturn.UUCP (Audrey Ishizaki) (03/03/84)

It is my understanding that only if you itemized on your federal taxes AND
claimed your state tax withholdings as deductions, AND received a state
tax refund that year, that, in the following tax year, you must declare
that state tax refund as income.

audrey 'did my taxes last night' ishizaki
hplabs!ishizaki

thomas@utah-gr.UUCP (Spencer W. Thomas) (03/06/84)

Only problem with doing your state taxes first - most states want you to
enter the "taxable income" from your Federal 1040 form.  So, you get
yourself into a loop - you need to do your Fed taxes so you can do your
state taxes so you can do your Fed taxes so you ...

=S

presley@mhuxj.UUCP (Joe Presley) (03/06/84)

The IRS documents say you deduct the state taxes WITHHELD from your pay in
1983, not what you figure you really owed.  Any state income tax refund you
get is counted as income for 1984 if you deducted this year.  (You didn't get
the money until 1984, did you?) If owe the state any, then deduct the extra
in the 1985 return. 

The extra deduction could put you into a lower tax bracket.  Unfortunately,
you could be in a higher bracket come next year. 
-- 

   Joe Presley (mhuxj!presley, ihnp4!j.presley)