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In 2006 I received a partial refund of my 2003 state taxes due to filing an amended return. So the question is, do I have to declare this as income on my 2006 federal return?

In 2003 I paid a little AMT, so I believe it is safe to not declare this refund as income, as my Schedule A deductions were trashed by AMT. Is it correct that if you pay any AMT at all, it means that your usual Schedule A deductions don't count at all (except for the few that AMT allows, of course)?

Second item: The state sent along some interest as part of the refund check. I believe that there is no excuse not to declare the interest. Right?

In sum, declare the interest, let the refund slide. Am I two for two?

--fleg
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In 2006 I received a partial refund of my 2003 state taxes due to filing an amended return. So the question is, do I have to declare this as income on my 2006 federal return?

In 2003 I paid a little AMT, so I believe it is safe to not declare this refund as income, as my Schedule A deductions were trashed by AMT. Is it correct that if you pay any AMT at all, it means that your usual Schedule A deductions don't count at all (except for the few that AMT allows, of course)?


No. It means you need to read up on the issue in Pub 525. (You are correct that the Federal year you're looking at is 2003.

Second item: The state sent along some interest as part of the refund check. I believe that there is no excuse not to declare the interest. Right?

Slam dunk.

Phil
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In 2003 I paid a little AMT, so I believe it is safe to not declare this refund as income, as my Schedule A deductions were trashed by AMT. Is it correct that if you pay any AMT at all, it means that your usual Schedule A deductions don't count at all (except for the few that AMT allows, of course)?

That's not quite right. You don't lose all of your itemized deduction. You only lose taxes and misc deductions. Medical deductions need to be adjusted for a 10% of AGI threshold in place of the usual 7.5%. Mortgage may need some tweaking if you have refinanced since your purchase.

But back to your issue.

What you really need to do is recalculate your amended 2003 return as if you had not deducted the portion of the income taxes that were refunded. Then compare that to the amended return as you filed it to see if the taxes provided any benefit. If they did not, then the refund is not taxable.

Second item: The state sent along some interest as part of the refund check. I believe that there is no excuse not to declare the interest. Right?

Right.

--Peter
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What you really need to do is recalculate your amended 2003 return as if you had not deducted the portion of the income taxes that were refunded. Then compare that to the amended return as you filed it to see if the taxes provided any benefit. If they did not, then the refund is not taxable.

OK. Then all I've got to do is haul my old computer and monitor out of the closet where I've got 2003 TT installed along with my 2003 returns. Could be worse--I could do it by hand, with the cap gains worksheet, AMT and some etc.

Thanks for both responses.

--fleg
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fleg9bo writes (in part):

Then all I've got to do is haul my old computer and monitor out of the closet where I've got 2003 TT installed along with my 2003 returns.

I reply:

It's probably not that hard to do it by hand. I faced this issue a couple of years ago, as I was just entering AMT land. Once I understood the theory, calculating the portion of my state taxes that yielded a federal income tax benefit (which, in turn, was the portion of my refund that was taxable) just required a little algebra. Here's the post where I do the math in my case: http://boards.fool.com/Message.asp?mid=22337499 . --Bob
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Bob,

Thanks for the link to your detailed explanation. You wrote:

every relevant dollar of state taxes paid reduces my ordinary income tax by $0.28.

My AMT (Form 1040, Line 44) is $270.91 and I will receive a state tax refund in 2005 of $1,623.86. I have no "unusual" AMT items -- in particular, no capital gains of any sort. Of my refund, $967.54 = $270.91/0.28 is the portion from which I received no tax benefit. Accordingly, the taxable portion of my refund will be $656.32 = $1,623.86 - 967.54. Will I indicate "tax benefit rule" on the appropriate line of next year's 1040? --Bob


I was also at the 28% marginal rate with plenty of other deductions. My AMT was $2,361 and my refund was $1,144. So I'll figure the portion from which I received no tax benefit as you did = $2361/0.28 = $8432.

Then I'll subtract that $8,432 from the refund of $1,144, to get ZERO taxable. I can live with that.

Thanks again.

--fleg
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OK. Then all I've got to do is haul my old computer and monitor out of the closet where I've got 2003 TT installed along with my 2003 returns. Could be worse--I could do it by hand, with the cap gains worksheet, AMT and some etc.

fleg, you can try using Glenn Reeves' Excel 1040 instead of resurrecting your old PC. Since you have your 2003 return information, you should be able to input that information and then work on the admendments as needed. If you know what you're doing, this should be a timesaver over potential troubleshooting with your old PC.

http://www.excel1040.com/

Bill
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