[Tax year 2020] Iowa Refund on Federal Income Filing Separately

[CB Lover]

We received an Iowa income tax refund in 2020.  If we file Federal income tax separately, how do we prorate the refund between the two of us as income?  Would we use the amounts from Iowa 2019 Line 26 Net Income or some other method?

[ErnieS0]

Use income. The Iowa Department of Revenue provides an example of how to prorate a refund:

Example 1: How spouses would prorate a federal refund:

• 2018 federal refund received in 2019 from a jointly-filed return: $1,000
• Spouse A has net income of $15,000 on the 2018 IA 1040.
• Spouse B has net income of $30,000 on the 2018 IA 1040.
• Total net income: $45,000 on the 2018 IA 1040.
• Divide Spouse B's net income by total income.
• The result is the percent of total income earned by Spouse B.
• (Spouse B's net income) $30,000 = 66.7%
• (Total of both spouse's net income) $45,000

• Then take $1,000 X 66.7% = $667. This is Spouse B's portion of the refund, reported on line 27 in column B.
• Spouse A's portion is $1,000 - $667 = $333, which is entered on line 27 in column A.
• These two amounts are entered on line 27 of the 2019 IA 1040.

Note: Round to the nearest one-tenth of a percent. For example, 66.74% becomes 66.7% and 66.75% becomes 66.8%

[CB Lover]

Ernie - Thanks for your answer, but I need the answer to a STATE refund.  Do you know about Iowa refunds?

[SamS1]

Did you take the standard deduction on your 2019 Federal returns?  If you did, you do not need to include the state tax refund as income for 2020.  Since the reason for including the state tax refund is based on the state tax deduction on Sch A, you would need to determine each spouse proportional share of the state tax deduction from the 2019 Sch A.  This is further complicated by the $10,000 limitation on the state and local tax deduction

Taxpayers who itemize deductions and who paid state and local taxes in excess of the state and local tax deduction limit may not be required to include the entire state or local tax refund in income in the following year. According to the IRS, a key part of that determination is calculating the amount the taxpayer would have deducted had the taxpayer only paid the actual state and local tax liability, with no refund and no balance due.

The IRS therefore ruled that if a taxpayer received a tax benefit from deducting state or local taxes in a prior tax year and the taxpayer recovers all or a portion of those taxes in the current tax year, the taxpayer must include in gross income the lesser of:

1. The difference between the taxpayer's total itemized deductions taken in the prior year and the amount of itemized deductions the taxpayer would have taken in the prior year had the taxpayer paid the proper amount of state and local tax; or
2. The difference between the taxpayer's itemized deductions taken in the prior year and the standard deduction amount for the prior year, if the taxpayer was not precluded from taking the standard deduction in the prior year.

[CB Lover]

Thanks for your detailed explanation.  I took standard deduction on Federal 2019 and itemized on State 2019.  With that combination, does your first paragraph hold true?  I received a Federal and a State refund in 2020.

[ErnieS0 · Accepted solution]

You will prorate according to your 2019 Iowa net income, meaning after your IA itemized deductions. That will be line 26 of your 2019 IA 1040.

[CB Lover]

OK, thanks for your information.