wjm@whuxj.UUCP (MITCHELL) (02/23/84)
According to the Form 1040 instructions and Publication 17, the proper procedure
for deducting income (and all other) taxes is to deduct all state and local
income tax PAID in a given tax year (calendar year for most people). This
includes state and local income taxes withheld from pay, pensions, gambling
winnings,etc, state and local estimated tax payments made in the year, any
balance you paid with your state and local tax forms during the year, and
any tax you paid with an amended return for earlier years paid during this
year.
If you get a refund of state and/or local taxes when you figure out how much
tax you actually owe for the year, it means that you deducted too much tax
in the earlier year and you must report the portion of the refund that resulted
in a tax benefit as income in the year in which you received the refund check.
As noted in an earlier article, you do not have to report the refund as income
if you received no tax benefit for it in an earlier year - e.g. if you used
the standard deduction in that earlier year.
EXAMPLE:
In 1983, you paid $500 in New Jersey Gross Income Tax (estimated tax)
and had $500 more of NJ Income Tax withheld from your pay, so
you paid $100 more with your 1982 NJ 1040 when you filed it on
April 15, 1983.
You paid a total of $1100 in NJ income tax during 1983, which you deduct
on your 1983 IRS form 1040 (Schedule A).
When you compute your 1983 NJ 1040 you find that your total 1983 state
income tax is $950.
Since you paid $1000 toward the 1983 tax ($500 estimated tax, $500 with-
holding) you receive a $50. refund (Note: you still receive a $50
refund even if you give some of it to the Wildlife Fund - that can
be deducted as a charitable contribution, even if you don't itemize).
Generally, you will have to report the $50 as income on your 1984 IRS
form (unless it did not result in a tax benefit, as explained in
an earlier item) that you will file in April, 1985./
Bill Mitchell
Bell Communications Researc
Whippany, NJ (whuxj!wjm)_