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Just received a 1099G from the state of Maine in the mail today. It shows the amount of our state tax refund from last year. Part of the letter states "The amount shown below may be taxable to you if you deducted the income or property tax paid as an itemized deduction on your federal income tax return." How can our state tax refund be taxable again? We did itemize last year and included our mortgage interest and our property tax in our itemized deductions. I'm confused! We filed last year with Turbo Tax and are doing the same this year. Where do I enter this 1099 in Turbo Tax? Thanks for any help you can provide.

Lemongirl
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How can our state tax refund be taxable again?

Actually, you were never taxed on this refund. If you itemize correctly you would have deducted the total amount of withheld state taxes from FY 2000 from you FY 2000 Federal Tax return. Since you received a state tax refund the amount of your state tax deduction was too large. Therefore you must claim the difference as income for the next fiscal year. This works in reverse as well; if you owed state taxes for FY 2000 that were paid in FY 2001 you could add them to this year's state tax withholding.

This concept makes for an interesting way to move income from one tax year to another.. IE, if you expect your tax rate to drop significantly next year, you may want to withhold extra state taxes this year. I'm not sure about the legality of this...

Jeremy
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Careful there. There is a revolting pro-rata calculation that applies to taxable refunds and state tax deduction.

Essentially if you make 4 equal payments of 2000 state estimated tax and you made the 4th payment in 2001, you can reduce your taxable refund by 25%. Of course you must reduce your state tax deduction by a like amount. Here's the yucky part.

Logic would tell you that if you make 4 payments of $1,000 and your refund is less than $1,000 then your overpayment was made in 2001 and you ought to be able to just ignore the refund and reduce your deduction. Unfortunately, the IRS has decided that the overpayment results from ALL payments and you can only reduce your refund by the PERCENTAGE that relates to the 2001 payment. BTW, your state withholding is assumed to occur evenly over the calendar year.

If you have entered all your payments and the dates you made them, into your software, it should calculate it correctly.

Are you confused yet?

ataxwitch
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I was thinking along the lines of employee wage withholdings. But I see your point.
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So, the bottom line is that since I paid too much state tax and got a refund, the feds consider this income, is that right?

And, now I have to go through Turbo Tax and figure out where to enter the refund amount. I assume it would be somewhere in the income section?

And yes, I am confused!

Lemongirl
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Lemongirl: I assume it would be somewhere in the income section?

Yes. In the Income section, you'll find "Government Payments / Form 1099-G". Go there, answer YES to that prompt and take it from there.

Shy
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So, the bottom line is that since I paid too much state tax and got a refund, the feds consider this income, is that right?

If you itemized on your 2000 tax return and deducted state taxes, yes. If you took the standard deduction on your 2000 tax return, NO!

And, now I have to go through Turbo Tax and figure out where to enter the refund amount. I assume it would be somewhere in the income section?

I would think so. I'm not a TurboTax user so I'm afraid I can't help there.

And yes, I am confused!

I'm sorry. I know that's not helpful, but I am.

ataxwitch








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