Here's another bug.. treatment of prepaid state capital gains taxes for home sales.

[MikeDemler]

And the list goes on...

I had completed the first pass through Federal, and proceeded to work on my CA state taxes, since the home my wife & I sold was there. We had prepaid the CA capital gains tax at closing, but of course TurboTax doesn't ask about that when you do the Federal, at least not directly. 

It does, however, ask about any "Withholding not already entered on a W-2 or 1099".

Well.. I had reported the CA tax payment there, but when I proceeded to do my state taxes,  I couldn't help notice that TurboTax calculated the entire amount would be refunded! Ignoring that (for the moment), I got to the point where it instructs the user to enter information from CA Form 593.. "Real Estate Withholding Statement".  The program makes you do that manually!! 

So... I filled that in and of course... TurboTax ignored the amount I had already reported.. duplicating my CA tax payments.. with the result that my refund was now calculated to be greater than I paid!  So.. I went back to the federal and deleted the "Withholding not already entered on a W-2".  I went back to state.. completed the tedious process of reproducing the CA Form 593.. and what does TurboTax do?? 

Pops up this helpful pointer: "Tax Withheld  It doesn't appear that the real estate or other withholding you've entered has been entered on your federal return..."

Well duh!!!!

It's so abundantly clear that Intuit doesn't require its programmers to actually test their code.. 

What a waste of time!

[hbl3973 · Accepted solution]

MikeDemler,

I've forwarded your issue to the power-that-be to dig into. As I also did a CA home sale in 2022, I am more alert than maybe some others to issues related to its handling.

[MikeDemler]

Thanks @hbl3973

I'd love to have access to those powers that be as well. 

[hbl3973]

Mike,

I got an initial reply back pointing to an issue with selling a rental property that qualified as a main home.  From what I can tell, the approach is to stay in the federal section and go to estimated taxes under credits and deductions.  Use the state estimates area and click the Additional State Estimated Payments button near the bottom to reveal a place to enter state tax payments and their actual date.  This would, of course, allow you to record the prepaid CA capital gains tax as of the date of closing.  Perhaps a bit of a backdoor method but should work properly and it transfers directly to the CA 5805 underpayment worksheet.

[MikeDemler]

@hbl3973 - thanks for the follow-up. It looks like those steps (in the Federal Estimated and Other Taxes Paid section) are exactly the ones I executed. That's what caused the error in the first place, because the program doesn't ask what that tax payment pertains to, it just labels it an "other" estimated tax. 

The problem is that the connection between Federal and State sections is one-way, feeding forward data but not taking into account where that data needs to go.  If I were managing the software development, I'd have them create the proper queries  to connect the two, so the payment is properly attributed. Since the software doesn't do that, it results in a duplicate payment: first in the estimated state tax payment section, and then in CA Form 593, which it knows to ask about because I'm reporting a home sale in CA! It should also know that when I'm reporting the home sale in the Federal section.   

CA 5805 doesn't apply here, at least not to me. I actually overpaid the CA tax. 

[hbl3973]

MikeDemler,

You'll need to enlighten me.  In my case, at least, I sold a house and CA will tax the federal capital gain on it, as indeed, all capital gains, at ordinary CA income rates.   As those capital gains automatically transfer to the CA return on line 7 of Schedule CA, they are taxed without the need for manual intervention.  (The one exception is if there was depreciation taken on the property.) Any CA tax payments during the year, whether withheld from a W2 or 1099 or made as separate payments, are lumped together and subtracted from the calculated state income tax, itself effectively a lump sum, to determine what amount you owe or are to be refunded.  I'm not seeing the extra payment is being double counted in my testing.  Did you include the $250K/$500K gain exclusion in your analysis?  I really want to be able to reproduce your issue.

[VolvoGirl]

Will this help?  Here are my old notes.

There is a mandatory 3.3% California State withholding tax on rental real estate  sales on form 593.

Here are my old notes on how to enter it.

To Enter it go to the state tab and step though all the screens (many screens) until the very end and it will ask for Any Real Estate or other withholding forms.  But then it says to also enter it under the Federal side.  So go to.....

Federal Taxes (or Personal for Desktop HB)

Deductions and Credits

Then scroll way down to Estimates and Other Taxes Paid

Other Income Taxes - Click the Start or Update button

Next page scroll down to bottom section Other Income Taxes Paid

Click Start or Update by Withholding not already entered on a W-2 or 1099

Then you need to go though the CA return to the very last screen and put it in again so it shows up on the CA 540 line 73 for Real Estate Withholding and not line 71 as income tax withholding.

[hbl3973]

VolvoGirl,

Interesting and amazingly convoluted.  Must have taken many hours to work that out! DebraS also found Where to enter prepaid tax with the sale of a rental? 

I believe, however, that Mike is talking about the same thing I am: the sale of a personal residence and not a rental property.  He talks about capital gains tax and not a sales tax withholding. There are quite a few exemptions to withholding in my case and no such withholding appears on my settlement closing statement.

[MikeDemler]

@hbl2793

One thing to note is that I'm filing a CA nonresident return. Our home there sold after we had moved out of state, and I have no other CA income in 2022. 

So.. the only place the tax I prepaid should appear is on CA Form 593: "Real Estate Withholding Statement".  Our realtor in CA cautioned us to pay that at the closing, which is how we have Form 593 as part of our return. The TurboTax CA program is well aware of that form also, and requires users who have received it replicate it manually. Once one does that, it registers in addition to any "other state tax" entered in the Federal portion of the program.   A serious error!

[MikeDemler]

@VolvoGirl

As you can see in my reply to @hbl3973, this issue involves the CA Form 593: "Real Estate Withholding Statement", which is what the state requires for prepaying its capital gains tax.  The TurboTax CA state software includes a tedious manual process for replicating that form, which results in duplicating the "other" tax I said I withheld in the Federal part of the program. Basically, one side isn't talking to the other. Dumb!

[hbl3973]

Mike,

What volvogirl provided also appears in the FAQ

https://ttlc.intuit.com/turbotax-support/en-us/help-article/import-export-data-files/enter-ca-form-5... 

Is you point that this doesn't work at all or is it that it is unnecessarily complicated?  Let me know so I can clarify what the TurboTax team should focus on first: a workaround or a major simplification of the flow?

[MikeDemler]

That's an interesting set of steps @hbl3973 , similar to what I discovered, but seriously... start with your CA State return?  If that's necessary, then TurboTax should be responsible for introducing it, not to have it buried in an obscure FAQ. 

Because of the numerous issues I've encountered, I have restarted my return from scratch. I'll let you know if I see the same error. And YES, that is the issue.  Errors introduced by the software!

How is a user to know this convoluted set of steps, when by following the program's step-by-step process it creates duplicate entries for the CA capital gains tax payment? 

[MikeDemler]

@hbl3973 

Here's an update.

Starting over from scratch, I once again reported the CA Capital Gains tax I paid at the closing of our home sale in the Federal section, in the "other" State withholding category.  Proceeding to the CA state section of the program, TurboTax initially reports that entire amount as a refund, because it ignores all the information about where the home was located, and that capital gains applies.

But in the final check, I noticed that how TurboTax handles this has changed. It didn't ask me about the CA Form 593 until then, nor did it ask me to manually replicate the form. Instead, it asked me if an entry in the Tax Payments worksheet was associated with Form 593.  (see below). Still a very backhanded way to handle it, but better than what I saw before. And huh.. no Form 593 in my CA state files. 

[hbl3973]

MikeDemler,

OK, apparently the workaround didn't solve the issue because the Form 593 is supposed to be attached to your CA return according to https://www.ftb.ca.gov/forms/2022/2022-593-instructions.html .  I'll update the TT folks to tackle this missing piece and then turn to the simplification that is begging to be done.  Thanks.

[MikeDemler]

Thanks for this information @hbl3973 

I can see now why our realtor was so emphatic about following this procedure.  (I wish someone had been just as strict on the Federal withholding. We had to pay a penalty for being late on that).

But this webpage is somewhat confusing (that's typical). It states "The form must be sent to the FTB by the 20th day of the calendar month following the month in which escrow closes."

But then later on there's this:

How to Claim the Withholding

To claim the withholding credit you must file a California tax return. Report the sale or transfer as required. Enter the amount from Form 593, line 37, Amount Withheld from this Seller/Transferor, on your California tax return as withholding from Form(s) 592-B, Resident and Nonresident Withholding Tax Statement, or 593.

That is exactly what TurboTax did in my most recent iteration. 

But then the FTB also says this:

• Attach a copy of Form(s) 593 to the lower front of your California tax return. Make a copy for your records.

So yes, although this statement implies an antiquated paper return, it looks like TurboTax should include Form 593