Is it required to deduct "State Income Taxes Paid" if you itemize (Schedule A)?

[Opus 17]

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@MelO4 wrote:

I thought the State Tax deduction rule was: if you deduct the State Tax this year (get a benefit) but then get a refund of it next year, then you are taxed on the State Refund (paying back the benefit).  

I'm getting confused because it's an Estimated Payment and I'm hoping I get most of it back next year.  

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This is more fuzzy thinking.  Suppose you paid $10,000 in estimated payments and only owe $2000 of actual tax (an extreme over-estimate).  You can deduct the $10,000 now and save $2200 of income tax.  Then your $8000 refund is taxable and would raise your tax next year by $1760.  You still come out ahead.

Now, my imaginary examples is more complicated than that because of the $10,000 SALT cap.  But in that case, you would apply the tax benefit rule and only part of your refund is taxable.  For example, if you paid $4000 of property tax, your income tax deduction is capped at $6000 even if you paid more.  So if you made a $10,000 estimated payment, you only get a $6000 benefit.  If you get a refund of $8000, then your tax would have been $2000, and since you got a $6000 benefit, only $4000 of the refund is taxable.   I know it sounds complicated, but Turbotax will calculate this for you.

There's no good reason to pay more tax now because of fear of a refund. 

[MelO4]

This is very interesting.  I understand what you are saying.  It's just so complicated.  Wow!  I like what you wrote: "the fear of a refund".  lol

[roylewis]

I paid more than the $10K SALT limit for just my real estate taxes. So including state taxes is useless as an itemized deduction.  But by including it (even though it wasn't used) I would still be taxed on my state refund next year. If I don't include it my state refund shouldn't be taxable at all.  Correct?

[Hal_Al]

Q. Is it required to deduct "State Income Taxes Paid" if you itemize (Schedule A)?

A. No.

Q. But by including it (even though it wasn't used) Would it  be taxed on my state refund next year?

A. No. You state refund is not automatically taxed just because you itemized. TT does a work sheet to calculate the taxable portion, of the refund, if any.   The property tax is counted  as a deduction first. 

[roylewis]

I'm not sure this is correct.  Schedule A has a line item (5a) for indicating your state taxes paid.  If the total tax (line 7a) exceeds the max it is reduced to the maximum allowed.  But it doesn't indicate which of the three entries was used for that $10K amount.  The state tax was still used in the calculation thus you should get a 1099-G for the state tax refund.  And looking over the Schedule 1 Line 1 worksheet it doesn't task into account which of the three items were used for the deduction; just the reduced amount.

Since I have enough property tax to exceed the maximum I would rather not include the state tax paid at all. It just isn't making any difference in my deduction.  Thus, if i don't include it, I shouldn't get a 1099-G next year for the state tax refund.  But TT doesn't seem to le me change that without altering my W2 info.  Any idea how I can tell TT not to use my state tax paid on line 5a of Schedule A?

[fanfare]

the simplest way is to opt for the sales tax deduction instead of State income tax deduction.

@roylewis 

[rjs]

@roylewis 

"But it doesn't indicate which of the three entries was used for that $10K amount. . . . And looking over the Schedule 1 Line 1 worksheet it doesn't task into account which of the three items were used for the deduction; just the reduced amount."

The $10,000 maximum applies to the total state and local taxes, not to any particular tax. The tax law does not designate a particular type of state or local tax that is "used for" the $10,000 deduction.

"The state tax was still used in the calculation thus you should get a 1099-G for the state tax refund."

"Thus, if i don't include it, I shouldn't get a 1099-G next year for the state tax refund."

The state sends you a 1099-G if you got a state income tax refund, whether or not you claim a deduction for state income tax. What's on your federal tax return does not affect whether the state issues a 1099-G. Getting a 1099-G does not make your refund taxable. How much, if any, of the refund is taxable is calculated when you file your tax return.

"And looking over the Schedule 1 Line 1 worksheet it doesn't task into account which of the three items were used for the deduction; just the reduced amount."

I'm not sure what worksheet you're looking at. The calculation of how much of your state refund is taxable is done on the State and Local Income Tax Refund Worksheet. It does take the $10,000 limit into account. Essentially it calculates whether you got any tax benefit from deducting the amount that was later refunded. It figures out how much your deduction would have been if the amount of the refund was subtracted from the amount of state income tax that you entered. If you would still have been above the $10,000 maximum, none of your state refund will be taxable.

[roylewis]

That worked for me.  I switched to using sales tax and claimed $0 because entering anything else just didn't make a difference,  And it allowed me to not have to over-ride the value presented for the sales tax.  Thanks.