Question from Manny
March 27, 2010 at 2:42pm
I've been looking at all the IRS publications and have not been able to get a straight forward answer so far. Here is my situation:
- I paid AMT for 2008
- I took itemized deductions in 2008
- I paid one installment of my 2008 state estimated taxes in 2009
- I received state refunds with corresponding 1099-G statements
- I am trying to figure out what portion if any of the state refunds I received for 2008 is taxable in 2009
- I am itemizing again in 2009
I used Turbo Tax to do my Federal and it calculated that $59 dollars of my refund was not taxable. I have not been able to figure out how this number was calculated. I thought that since I had to pay AMT in 2008 which disallowed all of my state tax deductions, that none of my state refunds should be taxable. I have gotten hints from my reading that because I paid estimated taxes in 2009 for my 2008 taxes, that this needs to be taken into account.
I am just trying to figure out what worksheet I should be using since I cannot use the one that comes with the 1040 instructions because I paid AMT. I have not been able to find an appropriate worksheet either in Publication 525. Can you provide me either the worksheet I should use or what the exact formula should be?
Answer: Manny - I am going to refer you back to Publication 525 since it contains the discussion that addresses your question. In it you will see that you have at least two of the conditions that disallow your use of the work sheet in the 1040 instruction book.
Itemized Deduction Recoveries
The following discussion explains how to determine the amount to include in your income from a recovery of an amount deducted in an earlier year as an itemized deduction. However, you generally do not need to use this discussion if you file Form 1040 and the recovery is for state or local income taxes paid in 2008. Instead, use the worksheet in the 2009 Form 1040 instructions for line 10 to figure the amount (if any) to include in your income.
You cannot use the Form 1040 worksheet and must use this discussion if you are a nonresident alien (discussed later) or any of the following statements are true.
The recovery is for a tax year other than 2008.
The recovery is for a deducted item other than state or local income taxes, such as a general sales tax or real property tax refund.
On your 2008 Form 1040, line 42 was more than line 41.
You received a refund of state and local income taxes in 2009 that was more than the excess of your 2008 state and local income tax deduction over the amount you could have deducted for your 2008 state and local general sales tax.
your last payment of 2008 state or local estimated tax in 2009.
You owed alternative minimum tax for 2008.
You could not deduct all your tax credits for 2008 because their total was more than the amount of tax shown on your 2008 Form 1040, line 46.
You could be claimed as a dependent by someone else in 2008.
You had to use the Itemized Deductions Worksheet in the 2008 Schedule A instructions because your 2008 adjusted gross income was over $159,950 ($79,975 if married filing separately) and both of the following apply.
The amount on line 8 of that 2008 worksheet would be more than the amount on line 4 of that worksheet if the amount on line 4 were reduced by 80% of the refund you received in 2009.
Nonresident aliens. If you are a nonresident alien and file Form 1040NR or 1040NR-EZ, you cannot claim the standard deduction. If you recover an itemized deduction that you claimed in an earlier year, you generally must include the full amount of the recovery in your income in the year you receive it. However, if you had no taxable income in that earlier year (see Negative taxable income. later), you should complete Worksheet 2 to determine the amount you must include in income. If any other statement under Total recovery included in income is not true, see the discussion referenced in the statement to determine the amount to include in income.
Total recovery included in income. If you recover any itemized deduction that you claimed in an earlier year, you generally must include the full amount of the recovery in your income in the year you receive it. This rule applies if, for the earlier year, all of the following statements are true.
Your itemized deductions exceeded the standard deduction by at least the amount of the recovery. (If your itemized deductions did not exceed the standard deduction by at least the amount of the recovery, see Standard deduction limit, later.)
You had taxable income. (If you had no taxable income, see Negative taxable income, later.)
Your deduction for the item recovered equals or exceeds the amount recovered. (If your deduction was less than the amount recovered, see Recovery limited to deduction, later.)
Your itemized deductions were not subject to the limit on itemized deductions. (If your deductions were limited, see Itemized deductions limited, later.)
You had no unused tax credits. (If you had unused tax credits, see Unused tax credits, later.)
You were not subject to alternative minimum tax. (If you were subject to alternative minimum tax, see Subject to alternative minimum tax, later.)
State tax refund. In addition to the previous six items, you must include in your income the full amount of a refund of state or local income tax or general sales tax if the excess of the tax you deducted over the tax you did not deduct is more than the refund of the tax deducted.
If the refund is more than the excess, see Total recovery not included in income. later.