State tax filing

I think I finally see whats happening after writing it all out and wasting 3 hours of my life that I'll never get back, which is depressing...but hopefully this will help others.

This issue stems from this thread that I found over here where the "tax pros" were describing our problem or question, kind of...: https://proconnect.intuit.com/community/proseries-tax-discussions/discussion/california-unemployment...

After I finally buckled down and paid for TurboTax Online tonight, I was able to preview my Federal and State returns...and its starting to make complete sense that things ARE GOOD on the TurboTax side, albeit frustrating. (And my HR Block return must be wrong somewhere with all things considered now).

Here's the explanation along with the best examples I could think of:

On the Federal 1040, TurboTax is essentially declaring your California Unemployment Income, and then its canceling it out up to $10,200. Im sure this is simply for documentation purposes for the government and to track things. This means that your total Income on your Federal return is not actually taxing you for ANY California Unemployment (UP TO $10,200 of Unemployment being waved...anything beyond that $10,200 and you still get taxed on the remaining amount past $10,200 only on the Federal return. Please remember that California never charges for any amount of CA Unemployment Income on the State Tax return, so you should not be paying any taxes whatsoever for your CA unemployment on your CA State Tax Refund. I'll reiterate, any unemployment income over the amount of $10,200 is taxed only on the Federal Tax Return, and thay is only if you earned more than $10,200 worth of unemployment during the year 2020). This part is hopefully simple to understand as Im describing it. I believe this is all working in TurboTax now, but you can confirm this by following all of the numbers yourself if you choose to preview your Federal and State TurboTax tax returns and following your "total income" numbers around on the Federal 1040 and Federal Schedule 1 1040 forms, and also on the California Schedule/Form CA and CA Form 540, to see how they canceled out your California Unemployment income from both the  federal and state tax returns. Or you can also call TurboTax support and ask them to help you with this. ***In order to preview your tax retund on TurboTax you first have to pay for your returns, and be careful not to actually submit your returns immediately after payment,  if you are just trying to preview all of your forms at this point. Again, Im confident that this is all working correctly at the moment though.

**Later on I describe how turbotax is canceling out your California state unemployment income, and you want to be 100% sure that you dont modify anything on your return without calling turbotax first, because if you do modify or override anything that TurboTax automatically fills in for you regarding your unemployment income. If you manually edit or change any of TurboTax's automatically populated unemployment calculations, then you might be accidentally giving yourself a "tax discount" by taking all of your federal income (that does NOT include your state unemployment income), and then subtracting your state unemployment income from your federal total income, which could basically make it look like you earned less income than you really did for you normal W2 and 1099 earnings, which would give you more tax refund money back than you actually should get. Again, I'll describe this in more detail momentarily.

SIMPLE EXAMPLE TIME:  So lets say you earned $60,000 last year and made $2,000 in California Unemployment. Thats normally $62,000 in Total Income that gets Federally taxed...however because of the American Rescue Plan Act, TurboTax simply adds and subtracts the $2,000 of Unemployment from your Federal Return, and then youre back to only paying taxes on the $60,000 you earned via other methods like normal W2 income and 1099, etc. In this scenario you arent being taxed at all for the $2,000 in CA Unemployment.

On the California State Tax Return, TurboTax is bringing in your Federal Total Income...lets call it $60,000 again. Lets again say that you received $2,000 in California Unemployment. What TurboTax does next, is they declare your Total Federal Income (which the Federal Total Income *normally* would include your State Unemployment Income as part of your Federal Total Earnings, so in this case, your Total Income on your Federal would normally have been $62,000 which includes your normal $60,000 of earnings plus your $2,000 of CA Unemployment Income...but NOW TurboTax does not include your State unemployment income within your Federal Total Income this year because of the American Rescue Plan Act, *unless you earned over $10,200)...So again, TurboTax is going to pull in your Federal Total Income of $60,000, which does not include the $2,000 of California Unemployment Income, because your unemployment income was less than $10,200 for the year 2020... Now you have to declare your California Unemployment Income on the California State Tax Return even though youre not going to be paying taxes for it (this also works if you made over $10,200 for unemployment during the year 2020). So what happens is that TurboTax pulls in your $60,000 Federal Total Income, and then declares your $2,000 in CA Unemployment Income and then again TurboTax subtracts your $2,000 in CA Unemployment Income right after that...so in the end, you are STILL only paying State Income Tax on the $60,000 Total Income that you earned in 2020, and you are actually not being charged for the California Unemployment Income Tax.

Let's say that you earned over $10,200 in unemployment income during 2020 and you did still pay SOME Federal Taxes on your unemployment income that went over $10,200... Well, let's say that you received $13,200 in unemployment during 2020 and your regular earnings were $60,000. TurboTax will take your $13,200 of unemployment income on your Federal Tax Return and it will cancel out $10,200, leaving you paying Federal Income Tax for the remaining amount of your unemployment that went over $10,200, which would be $3,000 over in this case, plus the $60,000 of your normal taxable income on your Federal return. So TurboTax would have you paying $60,000 normal income, plus $3,000 unemployment income, therefore $63,000 total federal taxes owed on your Federal Tax Return. Next, when you do your California State Tax Return, TurboTax is simply going to pull in your "Total Income" of $73,200 that includes your nirmal $60,000 in earnings, plus your $13,200 in California unemployment income, and then TurboTax will ultimately subtract your $13,200 of unemployment income from your State Tax Return, leaving you paying CA State Taxes on only the $60,000 of regular income that you earned. *I personally did not have the scenario where I received over $10,200 during the 2020 year, I personally received less than $10,200 in unemployment, but what I am writing here is how I see TurboTax working to cancel out all CA Unemployment Income in either scenario. Ultimately all you need to do is to confirm that you are not being charged ANY taxes on your California Unemployment Income, meaning that your CA state tax return should be zeroing out aka canceling out the full amount of CA Unemployment Income that you received, because California does not ever charge for Unemployment Income Tax,  regardless of whether or not you made over $10,200...It is *only* the Federal Tax Return that cares about whether or not you received over $10,200 in total unemployment income from any state(s).

I manually followed all of the numbers in the Federal and State forms, and I feel like based in what Im seeing, it looks good. As to why TurboTax Online makes it look like its subtracting your Unemployment and then re-adding it without good explanation I dont know...its pretty horrible and lacking good description and hopefully other TurboTax users find this thread here for my explanation and it helps out. I appreciated the TurboTax forum experts replies here, but I needed it more dumbed-down like Im hopefully doing for everyone here, and it took me a while to think through all the tax-speak and follow the numbers on the TurboTax full tax return that I was finally able to preview after I paid for the federal and state turbotax returns, in order for all of this to finally make sense to me. Im an IT Engineer by trade and I know how to document things and at least follow numbers, so Im pretty confident I understand all of this properly now as I write it out and see that TurboTax has is right, at least in all the situations Im describing here. If you are still suspicious of my findings, I highly recommend that you simply pay turbotax to let you preview your return (before filing it), and then all you have to do is follow the numbers across all the forms for federal and state and you should see that it works out as Im describing it here. If you still disagree, then I would get an accountant to help you and perhaps you could get TurboTax to refund you, but Im not sure how all that works with refunds....again though, I no longer think theres any issues with how TurboTax is doing all of this.

One thing that you may need to do in your TurboTax Tax Return since the American Rescue Plan Act was implemented, is to log into your TurboTax account again. and revisit your Federal *AND* State tax returns and click thru some screens to revalidate your W2 and income for example, just to ensure that the TurboTax Online software is updating your returns properly and re-checking them.

Lastly, here's the reason why I think the State Tax Return went up since the American Rescue Plan Act was implemented, as another user and myself were both confused as to why our State Tax returns looked higher before the American Rescue Plan and when we logged in later after the American Rescue Plan changes were added in. the State tax was suddenly higher:

I found another TurboTax Pro forum that actually had the "tax pros" discussing how TurboTax WAS previously in error. Lets go back to one of our earlier income examples...TurboTax software did have a bug a few weeks ago where it WAS taking your $60,000 in normal Total State Income and then subtracting your $2,000 in California Unemployment Income bringing your total State Income down to only $58,000 State Income, which is very wrong. This was wrong because your California Unemployment income doesnt give you the ability to say that you earned less money than you really were supposed to earn, and you were supposed to have been paying state tax on your normal income of $60,000, while the $2000 of unemployment income was supposed to just be canceled out. So again, our state taxes recently looked lower because TurboTax was for sure in the wrong previously, and TurboTax was for sure miscalculating our total income by incorrectly subtracting our Unemployment income from our normal income on our CA State Taxes. Please read on, as I'll provide more detail as to how TurboTax made their mistake (which is now remedied as of the time of my writing this and its why we see that are our California State Tax Returns likely got a worse, in terms of getting less money back or owing more money, since the last time we loggee in weeks ago before this fix that TurboTax made to how it calculates our CA State Unemployment Income).

Because of the tax changes being made to the Federal tax return by the American Rescue Plan Act (you're not including your Unemployment income under $10,200 to your total income anymore), you are essentially just getting more money back on your Federal Tax Return most likely or paying less on what you owe to the Federal Government, and youre not supposee to be subtracting your California Unemployment Income from your Federal Total Income like you used to do. What I mean by this, using our example from earlier, is that normally you would pay $62,000 Total Income on your Federal Tax Return which INCLUDED your state unemployment income...and then when you import the $62,000 Total Income over to your California State Tax Return, you would simply subtract the $2,000 of California Unemployment Income and then you would only pay state income taxes on the $60,000. In this scenario you would be paying more taxes on your Federal Income of $62,000, and youll be paying less taxes on your $60,000 California State Taxes. This is the scenario we were seeing *before* TurboTax implemented its American Rescue Plan Act.

This year is different though, because thanks to the new American Rescue Plan Act, we are now playing less Federal Income Tax than you normally would if you also received any unemployment income (if you had any Unemployment income during 2020). So this year in our example, you are paying $60,000 Federal Total Income Tax (TurboTax is canceling out the $2,000 CA Unemployment Income on the Federal side), and then once again you are paying the same $60,000 Total State Income Tax to California, and your California Unemployment Income is being documented and canceled out by TurboTax on your CA State Tax Return as well.

What TurboTax means by "no double-dipping" from the link I provided way earlier, is that you cannot put $60,000 in your Federal Income Tax and then subtract your $2,000 California Unemployment Income from it, because you shouldnt be lowering your total income making it look like you earned LESS than the $60,000 that you *actually* earned (we *arent* trying to claim that we earned $58,000 by subtracting $2,000 in CA Unemployment Income on our CA State Tax Returns). You are simply going to add your CA Unemployment, and then subtract your exact amount of California Unemployment Income you received on your Federal Return if you received less than $10,200 of unemployment, OR *if* you earned more than $10,200 of unemployment income, you will subtract the full $10,200 from your Federal Return and show whatever remaining unemployment income is left over, and this is document all of your Unemployment Income. In the end, using my ongoing example of receiving $2,000  in unemployment income, (if you earned less than $10,200 of unemployment), then you are still only paying $60,000 for your Federal Total Income and youre basically ignoring your $2,000 in CA Unemployment Income on the Federal Return...then on the California State Tax Return side, as Ive already mentioned and described, the same thing happens...you bring in the $60,000 you earned in your federal total income, which is the amount of money you earned via normal income that does NOT include any of your California Unemployment that was under $10,200, and you are also NOT going to take that $60,000 on the California State Tax Return and then subtract your $2,000 in Unemployment Income because that wouldnt make sense, right??? You're normal earnings were $60,000 and you dont get to just subtract another $2,000 off the top of that to make your Total Income look like its only $58,000 all of a sudden...in other words, you earned $60,000 of reportable normal income to California in your state taxes, and you are merely going to *cancel out* 100% of your unemployment income from the CA State Tax return...but you are NOT going to subtract your California Unemployment Income from the normal amount of $60,000 income because you actually earned $60,000 and you need to be taxed for that amount, and you will not be taxed for any CA unemployment on your CA State Return. This is actually the miscalculation/workflow issue that TurboTax made to our returns right after they first implemented the American Rescue Plan Act, and TurboTax hadnt yet fixed the California state tax side...so when we briefly saw that our California State Taxes were "better", either owing less money or getting more money back, it was actually because turbotax was pulling in your federal total income into your california state tax return (where your federal total income did not include your CA unemployment income at all, or had less CA Unemployment income added in if you made over $10,200 in unemployment), and then TurboTax was incorrectly subtracting your CA Unemployment Income from your normal federal Total Income, which was wrongly lowering your total income to less than what you actually earned through your normal income, which is why it likely looked like you owed less taxes because now all the other numbers were off and it looked like you likely paid more taxes than necessary and you now owed less money to CA or were getting more money back from CA. For example, TurboTax brought in your $60,000 unemployment-free-income into your state return, and then turbotax incorrectly subtracted your $2,000 of Unemployment income, which wrongly made your CA income become $58,000, and that made your CA tax return look a lot more attractive based on the fact that you already paid state taxes for your $60,000 of actual income, which would have been a bit of an overpayment on your taxes in this scenario (Thanks for the lack of change logs sent out to your customers or posted in detail online somewhere TurboTax!...would be nice to know exactly what gets changed to avoid all of this extremely frustrating confusion). TurboTax later corrected this issue, and now for the California State Total Income in our example, you'll have $60,000 of income marked down and another $2,000 of unemployment merely canceled out that you wont be paying taxes for.

In the end, in all the scenarios that Ive described, youre paying the correct federal and state taxes for everything that you earned as normal income (like the $60,000 earned in the example Ive been using), and you are NOT being penalized or taxed by TurboTax for having earned any Unemployment Income under $10,200 on the FEDERAL return (again, you will not be charged ANY unemployment taxes on the California State Return, as California does NOT charge ANY taxes on ANY amount of California Unemployment Income that you received)...and even though TurboTax is documenting how much Unemployment Income you earned, TurboTax is immediately canceling out ALL of the Unemployment Income on the CA State Return, and TurboTax is also canceling out all of the Unemployment Income on the Federal Return as long as it did not exceed $10,200 in Unemployment income (youll just pay the difference if you earned more than $10,200 in Unemployment Income), and again, TurboTax IS canceling out ALL California unemployment income on your California State Tax Return.... **If you feel like TurboTax is charging you taxes for more than 10,200 of your California Unemployment Income then I would call TurboTax support to ask them to go over your Schedule and Form CA along with Form CA 540 to prove it to you...but as of then time of my writing this, everything is checking out fine on my end. **Also, I'll repeat myself again here; if you modified your Federal Return manually to make any changes to your unemployment income on the federal return, or if you undid any changes to the CA state return that TurboTax automatically entered, then you may have broken TurboTaxes workflow and I would remove any manual edits you made and call TurboTax support (this is only if you did any overrides).

I know Im being overly descriptive and wordy here, hoping what I wrote makes sense...and this just sucked up another 1 hour of my life writing it...but I hope that all of this helps you folks already on this thread, and also helps anyone else who comes across this. I wish I had found this info before as it would have saved me a bunch of time and stress lol. If you like what I wrote, please give me a thumbs up on my post here so that I can feel like my pain and suffering through figuring all of this out and documenting it was hopefully worth it to help others lol. 

Take care everyone. I hope that all of you and your loved ones remain happy, safe, healthy, and employed through these difficult times both now and ahead!