The program asked me to enter line 5 from my 2015 schedule A form. The line is the taxes I paid in 2015. It reduced my refund from getting $68 to owing $146. Why?

[irmolives]

I don't understand why state and local taxes I paid in 2015 would lower my income in 2016. Especially when state and local taxes are deducted. This question came when the program was reviewing my return.

[ChristinaS · Accepted solution]

This calculation determines whether your 2015 state tax refund is taxable in 2016. The amount of taxes you deducted as an itemized deduction in 2015 does impact whether the recovery of that benefit (the state tax refund) is taxable.

After all, you deducted an amount that (some of which) you ultimately got back. That's a taxable recovery.

When your refund was showing as $68, your 2015 state tax refund was not yet included in your income. If you opted to go through the worksheet to determine if the refund was taxable, the worksheet was incomplete without that entry. When you corrected the missing information, the proper tax treatment of the state tax refund occurred.