How do I get TT to exclude state tax refund from taxable income? I itemized, but was SALT limited. IRS Rev Ruling 2019-11 says not taxable, but TT includes as taxable

[ccbulger]

I received a $3,000 state income tax refund in 2020 for overpayment in 2019.  I itemized in 2019.  However, my 2019 SALT bill was $36,000, of which I could only deduct $10,000.  As I read IRS Revenue Ruling 2019-11, the state income tax refund is NOT taxable for me in 2020 because I received no benefit from the deduction in 2019.  (My county property tax was $13,000 which far exceeds the SALT $10,000 max).  When I add the $3,000 state income tax refund into turbo tax, my taxes owed goes up.  How do I get turbo tax to understand this income is not taxable in 2020? Turbo Tax did ask the following question:  “Total of all your payments and withholding”  I entered my 2019 State tax withheld ($22K).  I entered my total 2019 SALT withheld ($36K).  Result was the same, Turbo Tax said I owed tax on the refund.

[Opus 17]

It may be a bug in the program, or at least a failure to adjust that sub routine for the new SALT cap.  The simplest thing to do is to remove the tax refund from the program.  I believe that when you enter the state and local refund section, even though TurboTax picks up the information from last year‘s return, it asks you if that is correct. I think you should be able to say no and change the amount to zero.  

(This is not a new procedure, although the revenue ruling re-states it in light of the new SALT limitation. The tax benefit rule has always been used to calculate whether a refund of a previous deduction is taxable. It seems that the section of the program may not be calculating it correctly.)

If you would be willing to help investigate the situation, go to the help menu and select “send file to agent.” This uploads an anonymized version of your file to tech-support and gives you a token number. If you post the token number here, I can forward it for review as a bug.

[jelo56]

My SALT in 2019 was over $17,600.  The cap for this is still $10,000.  I received a tax refund in 2020.  Just to confirm, TT is stating that since I did not receive a tax benefit from the SALT deduction, it is not taxable.  Is this correct?   Thank you.

[Opus 17]

That is correct, if your tax without the refund would still have been high enough that your deduction was capped, then you received no tax benefit from that portion of your state income tax, and therefore the refund of that portion of your state income tax is not taxable.

[fbrackin1960]

I understand this SALT conversation. My total SALT deductions were not quite as large as my refund. But I received a refund in one state and owed in a second state. My refund in state #1 should be reduced by what I owed in state #2 and then further reduced by over SALT deductions over $10K. Does that sound correct?

[Opus 17]

@fbrackin1960 

No, the two items don’t cancel each other out in that way, they are treated separately.  On your 2019 tax return, you deducted the state taxes that you actually paid in 2019, this is usually your withholding.  If you paid additional tax to state #2 in 2020, that is a tax deduction for 2020. You list it as an itemized deduction for 2020.

If you got a refund from state #1 in 2020, that may or may not be taxable income on your 2020 tax return depending on the tax benefit rule.  You have to analyze whether your overall itemized deductions for 2019 would have been less if you removed the amount of the state tax refund.  If you find that your deduction would have been less on schedule A with a reduced tax amount, that means you got a tax benefit in 2019 which means the refund is taxable in 2020.

[jelo56]

Thank you for your response.  Does TT produce a sheet that demonstrates that the prior year's refund is non-taxable?

I'm sorry but I am little confused by your wording, "If your tax without the refund would still have been high enough....."  My total state and local taxes together were over $37K ~ $19K state income taxes and $17K+ in real estate taxes.  I understand that this was capped at $10K.  In effect, I lost the deductibility of $27K+

Thank you.

[Irene2805]

Yes - In TurboTax the State and Local Income Tax Refund Worksheet shows the calculations in determining if any (and how much) of your state refund is taxable.

You can view this form using the following steps:

TurboTax Online

If you wish to preview your entire return, including the State and Local Income Tax Refund Worksheet, please follow these steps:

1. In the black bar at the left side of your screen, click on TaxTools > Print Center 
2. On the TurboTax Print Center screen, click Print, save or preview this year's return.
3. Mark the box(es) for your federal and/or state return.
4. In the next section, select Just my tax returns.
5. Click on the  View or print forms box. 
6. When the print screen comes up you can select the pages to be reviewed/printed.

TurboTax CD/Download

You can review your return by going into Forms Mode.  Please follow these steps:

1. Go into Forms Mode by clicking on the Forms icon in the top right of the blue bar. 
2. In the Forms in My Return list on the left, click St Refund Wks.  The form will appear on the right side of the screen.
3. You can view the form on the screen or you can print a copy by clicking the Print box at the bottom of the screen.
4. To return to the interview, click on the Step-By-Step icon in the top right of the blue bar.  

@jelo56

[Opus 17]

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@jelo56 wrote:

Thank you for your response.  Does TT produce a sheet that demonstrates that the prior year's refund is non-taxable?

I'm sorry but I am little confused by your wording, "If your tax without the refund would still have been high enough....."  My total state and local taxes together were over $37K ~ $19K state income taxes and $17K+ in real estate taxes.  I understand that this was capped at $10K.  In effect, I lost the deductibility of $27K+

Thank you.

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If the state taxes you paid in 2019 (income plus property taxes), after subtracting the refund you received in 2020, were still more than the cap, then you received no tax benefit from the refunded taxes.

If Turbotax is not calculating this correctly in your case, there may be a bug or oversight in the program.  If you go to the Help or Tools menu and select "Send file to agent" it will give you a token number and upload an anonymous version of your file to tech support.  Post the token number here and I can ask for an investigation. 

[Anonymous]

Not sure if people are still running into this problem.  I was in late February, but as of mid-March it looks like TT may have fixed it.  Because I knew it should not be taxed, I went to remove the 1099-G from the return and I noticed that the refund calculator did not change.  So I added it again (the same way I had previously) and after answering the questions this time it said "your refund is not taxable."  Previously it had been saying that it was taxable.  I changed nothing so it may have been an update in TT.

[369lisa]

I have the same problem. Not sure why Turbotax if making my 2017-2019 state taxes taxable, when I paid more that the SALT cap of $10,000. I cannot find the "sent to agent" option. please assist. thanks.

[369lisa]

I have the same problem. Is it a bug in Turbotax to tax my state refunds 2017-19 as taxable, despite the fact that I paid more state taxes than the $10,000 SALT cap for those years? Please assist.

[Opus 17]

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@369lisa wrote:

I have the same problem. Is it a bug in Turbotax to tax my state refunds 2017-19 as taxable, despite the fact that I paid more state taxes than the $10,000 SALT cap for those years? Please assist.

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Turbotax can't calculate the taxability of a refund more than 1 year old.  If you know the refunds will not be taxable, just don't enter them in the program. 

[chart8006]

I have a situation where the program is pulling in the state tax refund for 2020 and itemized when I did not receive the refund from the state yet in 2021. The program asked if any state income tax refunds had been received and I answered no. It still pulled the 2020 refund into the state and local tax worksheet for the federal return.

[MarilynG]

Yes, you would report your State Refund if you itemized last year (and are doing so again in 2021).

If you haven't received it yet, here's info on Tracking State Refunds.

Click this link for details on Taxable State Refunds.

@chart8006