State Tax Refund Recovery Exclusion Error

[sweetwine_man]

My 2019 state tax withholding was $20,000 and the refund was $3,000. I claimed the limit of $10,000 in deduction. i.e. the state tax refund didn't give me a tax benefit. However, Turbo Tax determines that my state tax refund is taxable. Is this an error on Turbo Tax? How can I fix it?

[ErnieS0]

TurboTax can compute the taxable portion of your state tax return. After you enter your state refund, you'll be on the State and Local Tax Refund Summary. Click Done.

1. You'll see Let's See if Your 2019 [State] Refund Is Taxable
2. Select I itemized my deductions in 2019
3. Answer "Did a parent or anyone else claim you as a dependent on their tax return in 2019?"
4. If you used TurboTax in 2019, TurboTax will ask you to confirm your 2019 information. If you say NO, you can make changes.
5. If you did not use TurboTax in 2019, enter information from your 2019 income tax return.

After you enter all your 2019 info, TurboTax will tell you how much of your refund is taxable.

[sweetwine_man]

Thank you for your reply.

I have entered the 2019 info in Turbo Tax and I don’t think the refund should be taxable based on the amounts I posted in the original post.  The refund didn’t give me a tax benefit in 2019. I am trying to understand why Turbo Tax thinks it’s taxable?

[ErnieS0]

You can use the IRS Worksheet 2. Recoveries of Itemized Deductions on page 27 of 2020 Publication 525 to figure whether your state tax refund is taxable.

You couldn't tell you what TurboTax is calculating without seeing your tax return.

You can schedule a call with a Live Tax Expert or request an offline review.

[sweetwine_man]

Thank you.

I used worksheet 2a from Publication 525 suggested and it says the refund is not taxable.

I have been trying to understand the Turbo Tax "State and Local Income Tax Refund Worksheet". Could you let me know how line 7(2) ("Refigured total itemized deductions") in this worksheet is calculated? I suspect that's wrong, but not sure what input it's calculating from.