Other Tax Questions
Questions and comments on other topics covered in Fairmark.com, such as UTMA accounts, and any tax questions that don't fit our other categories.
filing timing problem
Posted by: wanttoknow, June 8, 2017 02:26AM
I just filed an amendment to my 2014 return, in part to remove an itemized deduction for state income tax, so I don't have to report the refund of same on my 2016 return.

Is it safe to file my 2016 return now, or do I need to wait to allow the IRS to recognize that the state income tax is no longer a 2014 itemized deduction?

Re: filing timing problem
Posted by: DeeDee, June 8, 2017 05:45AM
There is no connection between a 2014 return and a 2016 return...or do you mean a 2015 return?

Re: filing timing problem
Posted by: wanttoknow, June 8, 2017 03:47PM
DeeDee,

In 2016 I received a refund of 2014 state income tax. That refund would be reportable on my 2016 federal return if it was an itemized deduction on my 2014 federal return.

I have just amended the 2014 return to remove the itemized deduction.

Re: filing timing problem
Posted by: DeeDee, June 9, 2017 05:26AM
If you received the refund in 2016 (unusual) you will have to report it on your 2016 tax return. It doesn't matter that you have filed to change the old return. You received and cashed the refund...you didn't send it back uncashed did you?

Re: filing timing problem
Posted by: wanttoknow, June 9, 2017 05:09PM
DeeDee,

Yes, I deposited the refund check.

I thought that a refund of non-deducted tax needn't be reported because of the following:

Pub. 525 (page 22) says: “You must include a recovery in your income in the year you receive it up to the amount by which the deduction or credit you took for the recovered amount reduced your tax in the earlier year.”

Since I have now amended my 2014 1040 to delete the refunded part of the state income tax deduction, doesn’t that mean that my 2014 federal income tax was not reduced by it, and thus I needn’t include the 2016 refund on my 2016 1040?

Here are the particulars:

Mar. 2015 - state income tax deducted on 2014 1040 - $3,567

Jan. 2016 - state income tax refunded - $877

June 2017 - 2014 1040 amended - state income tax deducted - $2,690



Re: filing timing problem
Posted by: kaneohe, June 9, 2017 07:21PM
Aren't you supposed to fill out the worksheet to figure
out quantitatively how much of the refund is taxable?
[apps.irs.gov]

Re: filing timing problem
Posted by: wanttoknow, June 9, 2017 08:58PM
The worksheet in the 1040 instructions applies only for a refund of the previous year’s state income tax. I.e. 2015, whereas mine was 2014.

The instructions for a refund of an earlier year’s income tax is in Pub. 525. I have already cited what Pub. 525 says about that that I believe means I don’t have to report the refund, since it's no longer in itemized deductions.

Re: filing timing problem
Posted by: kaneohe, June 9, 2017 10:50PM
The worksheet in Pub 525 looks very similar to the other one. Why not do the wksht in Pub 525 and see what you get quantitatively instead of waving your hands qualitatively. You might even be right but that would prove it, wouldn't it?

Re: filing timing problem
Posted by: kaneohe, June 9, 2017 11:38PM
Just curious whether you can deduct any fraction of the state income tax that you paid at will......e.g. If your state income tax paid was 10K, can you deduct 1K, 5K or 10K as you wish?

Re: filing timing problem
Posted by: wanttoknow, June 9, 2017 11:46PM
My understanding is that you can deduct any amount of state income tax that has been paid--including none at all. My policy is to never deduct any state income tax that I expect to get refunded. In this case, things were complicated, and I slipped up.

Re: filing timing problem
Posted by: kaneohe, June 10, 2017 02:49AM
Here is my limited recent experience w/ amended returns.
Taxpayer e-filed 2016 return with say $1200 due but paid nothing since it was in March. A week after e-filing taxpayer discovered new info that made the real amount due much smaller , say $400. Taxpayer waited 3 wks before mailing in amended return with check for $400.

Taxpayer then immediately got balance due notice of $800. Based on this info and help from this forum, we concluded e-file processing is fast; check processing is fast; amended return processing is slow. After e-filing balance due on account was $1200; after $400 check was processed, balance due was $800, and will remain so until somebody looks at and understands the amended return.

Based on that experience, I would suggest that you wait
until you know that your amended return is processed.

Re: filing timing problem
Posted by: wanttoknow, June 10, 2017 03:27AM
Thanks so much, kaneohe. Very helpful.

Re: filing timing problem
Posted by: DeeDee, June 10, 2017 06:42AM
wanttoknow Wrote:
-------------------------------------------------------
> DeeDee,
>
> Yes, I deposited the refund check.
>
> I thought that a refund of non-deducted tax
> needn't be reported because of the following:
>
> Pub. 525 (page 22) says: “You must include a
> recovery in your income in the year you receive it
> up to the amount by which the deduction or credit
> you took for the recovered amount reduced your tax
> in the earlier year.”

As Kaneohe mentioned use the worksheet in Pub 525 to see what is portion of the refund must be included in income.
>
> Since I have now amended my 2014 1040 to delete
> the refunded part of the state income tax
> deduction, doesn’t that mean that my 2014 federal
> income tax was not reduced by it, and thus I
> needn’t include the 2016 refund on my 2016 1040?
>
> Here are the particulars:
>
> Mar. 2015 - state income tax deducted on 2014 1040
> - $3,567
>
> Jan. 2016 - state income tax refunded - $877
>
> June 2017 - 2014 1040 amended - state income tax
> deducted - $2,690

Trying to follow your timeline...You filed 2014 income tax in March 2015. What do you mean by Jan. 2016 state income tax refunded? What explanation are you giving on the 1040X for the 2014 amendment?

I stand by my original answer that since you received the refund check and cashed it in 2016 it needs to be reported as 2016 income based on the Pub 525 worksheet.



Re: filing timing problem
Posted by: wanttoknow, June 10, 2017 08:15PM
DeeDee,

You said:
“Trying to follow your timeline...You filed 2014 income tax in March 2015. What do you mean by Jan. 2016 state income tax refunded? What explanation are you giving on the 1040X for the 2014 amendment? “

I filed the 2014 1040 in March 2015.
The 2014 state income tax was refunded in Dec. 2016. (“Jan. 2016” was mistake.)

The explanation I gave on the 2014 1040X (just filed) was:

“$877 Pennsylvania income tax deduction removed from Schedule A.
Reason: So don’t have to report tax refund on 2016 1040.”

My motivation for amending the 2014 1040 was to avoid dealing with this worksheet. It and the Pub. 525 section on recoveries are a nightmare.

I have dealt with Pub. 525 in the past, and the I.R.S. rationale is that if you derived a tax benefit from a deduction in an earlier year, you must pay tax on any recovery of that in a later year. But now that I have removed $877 of itemized deductions from my 2014 1040, any tax benefit of that has disappeared.

In fact, the very first sentence of the Pub. 525 "Recoveries" section is "A recovery is a return of an amount you deducted or took a credit for in an earlier year." So it seems to me the $877 refunded is not a recovery and is not even subject to Pub. 525.



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