Dear TurboTax Community,
I read an article on Pocketsense.com entitled "Why Apply Your State Refund to Next Year's Taxes?"
A paragraph in the article made the following claim:
Pay Less Income Tax
"If you itemize deductions, you usually have to count some or all of your state tax refund as taxable income the following year. If you apply the refund to your taxes for next year, however, you no longer have the refund as income. You thus will have to pay less in income tax."
I know the taxability of a State Income Tax Refund depends on many factors that are outlined in the IRS 1040 Instructions Publication, Schedule 1 Additional Income, and the State and Local Income Tax Refund Worksheet - Schedule 1, Line 1. Such as: whether state/local income tax or general state/local sales tax was itemized and deducted for the tax year, or whether the taxpayer received a benefit for the deduction, or whether the Standard Deduction was taken, etc.
But all things being equal, the general premise of their paragraph is: If you receive a State Income Tax Refund payment (check or direct deposit), it may be taxable on your Federal tax return next year. If you apply the refund to your taxes for next year..... it will not be taxable on your Federal return.
I've never heard of such a thing! Is what they say, true? Does it matter whether you take the refund as a payment now, or have it applied to next year? Is there a taxable difference between the two?
I'm just curious. Thanks.
Applying your state refund to next year's state estimated tax is the same as if you got the state refund by check or direct deposit, then wrote a check for a state estimated tax payment. Applying the refund to next year's tax does not change the taxability of the refund. The article is wrong.
The link that you posted gets an error. Here's a link to the article that you are asking about.
the only reason you would want to apply a state overpayment to next year is that you need to make state estimated tax payments. if you request a refund you may have to wait months to get it while having to immediately make the estimate.
Turbotax should be able to determine taxability using the state tax refund worksheet.
in IRS PUB 525 there are worksheets (2 and 2a) to help. read the notes carefully. there are numerous reasons that the refund would be partially or wholly nontaxable
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