Is my state tax refund actually non-taxable?

[gqyhhh]

I filed 1040NR for previous year (2018) and deducted $10000 for state income tax (withhold amount is slightly over $10000, assume it's $10500). Since I was an non-resident alien, I can only claim itemized deduction, although standard deduction would be higher. I will file 1040 this year.

I got a refund (assume it's $2500) from California, and entered the value from form 1099-G in turbotax. I also selected that I used itemized deduction and some values from my 1040NR. Then it told me the refund is not taxable.

After reading this answer (https://ttlc.intuit.com/community/taxes/discussion/don-t-believe-determination-that-my-state-tax-ref...) and the "State and Local Income Tax Refund Worksheet" in 1040 instructions, I believe after subtracting the $2500 from $10500, it would be $8000, so I have to pay tax on some of the refund ($10000-$8000=$2000).

I can manually choose in TurboTax that the refund is fully taxable, but I would have to pay more tax than necessary. Is my understanding correct?

[ThomasM125 · Accepted solution]

I agree with you. You should have deducted $8,000 of tax, but you deducted $10,000, so you have to add $2,000 back in this year. If you had deducted other state taxes, like property or sales taxes that made up the $10,000, then that would be different though.

[gqyhhh]

Thanks. I think TurboTax also uses "State and Local Income Tax Refund Worksheet—Schedule 1, Line 1" (https://www.irs.gov/pub/irs-pdf/i1040gi.pdf p.83) to determine whether it's taxable. It just asked my filing status and just used the corresponding standard deduction ($12000), which is smaller than $10000. However I can't use standard deduction for 2018.

Do you know if I can enter the $2000 manually in Schedule 1, Line 1 (Taxable refunds, credits, or offsets of state and local income taxes), instead of mark this whole refund taxable? Or maybe I can just enter $2000 as the amount from 1099-G and mark it as fully taxable? Thanks.

[Psyblade]

I had a similar question.  We filed a joint married return in 2018.  Up thru 2018, we always had our state tax refund added to our income.  In 2019, however, turbotax said it was not taxable.  I think the reason is that we paid state and local taxes of roughly 12000, but could only deduct 10,000.  Since our state tax refund was only about $1,500, IE less than the $2,000 that we were not able to deduct in 2018, in affect the money is considered to have been taxable in 2018 and so does not have to be added to taxable income in 2019.  I believe that is how it is working in our case.

[KarenJ2]

Your state tax refunds are taxable if the refunded tax was deducted in a prior year and the taxpayer received a benefit from it.

If the taxpayer used standard deduction in 2018, the refund would not be taxable. As the taxpayers did not itemize their deductions (which includes state tax paid), then the taxpayers do not receive a benefit.

There are other special situations but usually it is not taxable as the taxpayers used the standard deduction in the prior year.

[Psyblade]

Except that I answered all the questions correctly, saying I itemized, and Turbotax still said it was not taxable.  So, either my supposition in my previous reply is correct, or turbotax is not doing the taxes correctly.

[JamesG1]

Are you able to view your forms?  Are you able to view the State and Local Income Tax Refund Worksheet?

[Psyblade]

Yes, the State and Local Income Tax Refund Worksheet is all filled out.  I won't pretend to say I understand it all, but at this time I am going to take TurboTax's word for it that the refund is not taxable.  The numbers included on the form seems to be accurate.

[KrisD15]

Just because you itemized last year does not mean the refund is taxable income. 

It is a complicated formula, but basically figures what you claimed as a "taxes paid deduction" and how that affected your return compared to if you had taken the Standard Deduction. 

[hyha600]

Hi, anyone know what's the final solution for this? I faced the same situation for 2020 return.

I used 1040-NR at 2019 so took $5000 Itemized deduction, using the formula described in the original question, I do have a small (say $1000) positive amount, means I should pay tax on those I guess.

But TurboTax only has a question regarding "What's your filing status at 2019" which no Nonresident options are available, if I choose any status, it takes as "7c. 2019 standard deduction based on 2019 filing status and deductions". If I use "No Entry" TurboTax takes it as missing entry. I don't know if there's a way to override this to adopt to 1099-NR users in 2019?

[Steve916]

I have a similar situation.  My 2019 return was done in TT and was used to complete this year's returns.  I itemized my deductions in last year's return and listed my $2000 state tax refund as income on Schedule 1.  I had real estate and property taxes also. Line 5d  Schedule A was greater than $10,000 and TT told me to take the $10,000 amount on line 5e of Schedule A.   This year, it's telling me that last year's state refund is NOT taxable, but that seems to contradict the information in TT 2020 .   How do I tell if the state refund is taxable or not?   Thank you.

[Psyblade]

Steve916,

The same thing happened to me.  I am not positive, but I assumed that my state tax refund last year was not added to my income this year because the refund was less than the amount of state and local taxes that I was not able to deduct last year.  For instance, if your total state and local taxes last year was 12,500, and you were only able to deduct 10,000, you were not able to deduct the 2,500.  Since last years state tax refund was less than the 2,500, you don't have to count it this year.  It would only be counted this year is you were able to deduct it last year--and you weren't able to do that.

[Steve916]

Thanks very much for the quick reply!   That makes sense.   I'll have to trust that TT is accurate and that Intuit will stand behind their program.