How do Oklahoma tax filers enter a 1099-G specifically related to the Parental Choice Tax Credit in the federal portion of "Wages & Income" in Turbotax?

[Grace55]

I contacted the state. I was told:

“do what you want.  As far as Oklahoma is concerned, it’s not taxable for the state. We were required to send out the 1099 due to federal guidelines.”  
I contacted the IRS and was told to input on my schedule A (I believe that’s the sheet she said) but she couldn’t explain how the tax year listed on the 1099 would affect when to file or how that year is actually calculated. 
It was hoop after hoop with no real help. Generic answers continued to be spit out but no real thoughtful consideration on how to accurately enter the info and the tax year to apply the refund to. I was told by both parties that TurboTax needs to be updated but I had checked with H and R block and their system was the same (not allowing 2024 to be inputted as the tax year). 
I stand by statement that I think the tax year should have been 2022 as this was the year the state used to decide eligibility (and since the year paid was 2024, it is filed for 2024 as a tax credit/refund). The state allows the offset if done this way (so not taxed by state) and the federal form is able to utilize the info as to whether it is taxable from them (did you itemize in 2022 or not).  I think the state haphazardly sent out a 1099 because it was required by IRS without much thought—much like the responses I received when I called and emailed. 

[srtaylor1317]

This is helpful. Your argument for it being 2022 is a good one. However, since the state issued it for 2024, I am starting to think the best course of action is to hold onto it for a year and file it next year, since that is what will align with the state’s reporting. 

[JaniceK]

Everyone keeps trying to be logical on this problem --- and IRS computers are exactingly logical.

Here's the logic you need to worry about:

-  The  OK1099-G is for 2024 and show in Box 2, the IRS has that form and IRS computers will try to match that on and to your 2024 return.  Once it does not find it, you could trigger a IRS CP-2000 Changes to your Return Letter that you will need to respond to explaining your logic to the computer -- in about 6-9 months from now.  So best to put it in the return where the IRS wants to find it and back it out somewhere else with explanation if you are "holding" it over to 2025 --- don't just ignore it or leave it off the return which I have seen suggested.  Course that could generate another CP-2000 letter for 2025.

-  Oklahoma Statute has the payment as not-taxable for Oklahoma -- but Oklahoma starts with Federal AGI so there might an adjustment you need to make there to reconcile the two and get it off Oklahoma's return
-  Oklahoma Statute also is classifying this as a "State Income Tax Credit" so your IRS income calculation for 2024 on this amount is the same as the State Income tax within the Itemized Deduction.  Bottom line -- did you get a tax benefit from it -- if not, not taxable or if you don't itemize, not taxable.   That is the logic the IRS computers will use so data entry on whatever software you use needs to follow those guidelines for taxable or not in 2024 as to the "tax deduction" generated you got.   Keep in mind the SALT limitations if you go over the $10,000 limitation will start eating into that possible taxable amount also.

And finally, the IRS is now in the process of losing 10,000+ employees --- so lots of warm bodies going and coming and covering multiple positions while the IRS computers will be running by themselves 24 hours a day --- using computer matching logic not human logic.   "No $6,500 PCTC income on the return but a 1099G -Strike 1"

Keep that in mind as you make your decision how to report, when to report and where to report.

[srtaylor1317]

This is a long response...bear with me.

I absolutely love the logic-based approach. How will the IRS computer approach your return? However, I applied the same logic and came up with a different answer. Turbotax doesn't allow reporting 2024 1099-G with Box 2. This leads me to think the IRS computer won't know how to compute the state 1099-G for 2024, and the computer will simply disregard this form as not computable. In all of the IRS instructions I've read, none of the instructions entertain receiving a state tax credit for the current filing year, rather than a prior year. In other words, I believe Oklahoma is effectively "breaking" the IRS expectations for what is possible, and it's hard (maybe impossible) to know what the computer will do with the resulting paradox. I'm curious if there is evidence as to which direction the IRS computer will jump, or are we simply sharing our "pooled ignorance"? 

However, while working through the ramifications of this, I spent some time with the IRS instructions more carefully (not just Turbotax instructions). Here is new information that I don't think other responses have addressed:

Instructions for Schedule 1, line 1 read "See Itemized Deduction Recoveries in Pub. 525 instead of using the State and Local Income Tax Refund Worksheet in these instructions if any of the following applies. 1. You received a refund in 2024 that is for a tax year other than 2023." Since this is a true statement (the refund is listed as tax year 2024), I went to Pub 525. Alternatively, go to Pub. 525 if any other rules apply, such as "Your 2023 state and local income tax refund is more than your 2023 state and local income tax deduction minus the amount you could have deducted as your 2023 state and local general sales taxes." Since the PCTC credit exceeded my SALT deduction, this statement also directs me to Pub. 525.

So, in Pub 525:

The amount of the tax credit on 1099-G that is actually reportable as income has several limitations:

1) Standard Deduction Limit: the taxable amount can't be more than the difference between itemizing and taking the standard deduction. (this saves you from redoing past year taxes to just take the standard deduction).

2) Recovery limited to deduction: the taxable amount can't be more than the amount of state tax that was formerly deducted from income. (you only received a benefit to the extent you deducted state income tax. So, that's the maximum you have to add back).

3) there are other specialized cases as well that I won't bother to list in full.

So, worst case scenario: for folks who itemize, the max taxation is still limited by Pub. 525.

But again, the paradox: If you are attempting to apply these directions literally, you get stuck. Working through the Pub. 525 worksheet 2 (Recoveries of Itemized Deductions): It's impossible to know what your itemized deductions for 2024 are as of yet, because you're still working on those taxes! If you simply decide to treat this as a 2023 number, there will be a mismatch with the IRS computer, which DOES have a 1099-G value for 2023. Won't the IRS reject this?

So, a conservative approach would be to report PCTC as taxable income, but I would think you can still apply the applicable limitations. For me, I'm limited to the amount of state tax I previously deducted. The less conservative approach would be to just ignore the form for another year, when it will be easy to report the income. 

[srtaylor1317]

One more thought for all who are wrestling with this: You might check and make sure you are actually impacted. I feel a little silly for having just realized that even if I report both 1099-G forms (2023 and 2024) as 2023 income, it doesn't actually change my tax liability compared to just reporting the form for year 2023. I'm limited in both bases by the worksheets, based on PY state income tax that was actually deducted. So, for my own situation, I'm unconcerned about an audit for a missing form, as it won't change my tax liability, even if I have to refile with the missing form.

Moral to the story: Make sure this actually impacts you before worrying too much.