Federal taxes on California paid family leave 1099-G. Can I deduct SDI payments made to California from 1099-G payment?

[user17]

This site - http://www.jeffjacobslaw.com/taxability-of-california-paid-family-leave-pfl-benefits/ says I can deduct CA SDI payments from 1099-G payment. This reduces my tax liability. Can you confirm this can be done?

[TerryA · Accepted solution]

Yes, CA SDI payments may be deducted from PFL but only if you have not taken the amount of SDI payments used to reduce your taxable PFL income as an itemized deduction. i.e. you can't use it as a deduction twice.

So, in theory, you could (somehow) add up all CA SDI amounts withheld over the years then subtract from that total all SDI amounts used as an itemized deduction over the years, and the net result is the total SDI not used as a deduction yet. That net amount may be used to offset PFL taxable income on your federal return.

[user17]

Thanks Terry

[dsmodafferi]

If a married couple is filing jointly and only one spouse received PFL income, can the couple deduct both spouses’ SDI payments or only the spouse who received PFL?

[dsmodafferi]

If a married couple is filing jointly and only one spouse received PFL income, can the couple deduct both spouses’ SDI payments or only the spouse who received PFL?

[john_742]

Hi Terry,

Thanks for the info.  However I talked with one of the TT CPAs and they did not know how to add this info.  On 1040 schedule A, the only 2 places might be line 6 or 16, but the instructions don't really fit.  Or would you add it to the SALT paid, in which case that is limited to $10k (which I am already over due to property taxes)?  Or would you modify the 1099-G directly, which I don't really want to change what is on that form?

I did the math and figured out how much CASDI taxes I paid on past non-itemized years, so this could definitely reduce my tax basis on the PFL benefits I received in 2019.  Any help is much appreciated.  Thank you!

[ljshikr]

I have a client who the IRS is denying the deduction, entered on 'other income' line for the SDI taxes paid in prior years where no itemized deduction was taken. What IRS code or ruling do you reference for this?

Thank you.

[DaveF1006]

The IRS is denying the deduction on the "Other Income" line because that line is for reporting income (or very specific adjustments), not for claiming state taxes paid. Here is their rationale behind it.

1. I assume that your client is taking the position that if they did not itemize in those prior years, when they "elected" to take the Standard Deduction instead of the SDI deduction, they can claim that retroactively this year. That is false.
2.  To claim them, they must file prior year's amendments to claim those previous SDI state taxes they missed previously. To claim, they will need to:

• File Form 1040-X for those years to switch from the Standard Deduction to Itemized Deductions (if the SDI + other taxes exceeds the Standard Deduction). 
• If the Standard Deduction was still higher even with the SDI included, then the SDI tax provides no federal tax benefit.

As far as ‌reference, I like The Timing Rule: IRC Section 461(a).

IRC § 461(a) states:"The amount of any deduction or credit allowed by this subtitle shall be taken for the taxable year which is the proper taxable year under the method of accounting used in computing taxable income."

If not taken in the year the taxes were paid, the SDI taxes can't be ‌claimed retroactively. 

[ljshikr]

Thank you for your explanation.

This seems to be a controversial subject. Other sources that I consider credible say that the reduction can be made and that the mandatory payments to the program create basis. (including prior years)

Looking at Tax Year 2023, Schedule 1 (Form 1040) it says:

"If you made contributions to a governmental unemployment compensation program or to a governmental paid family leave program and you aren't itemizing deductions, reduce the amount you report on line 7 by those contributions."

I may be misinterpreting this, but it does seem to apply to this tax year. Maybe not the retroactive payments?

I appreciate the feedback to help me understand this.

[DaveF1006]

It does apply for this year as well as previous years, but can't be claimed as a retroactive lump-sum payment this year. You would need to amend the previous three years' returns to claim the contribution.