Is your federal tax refund reportable income?

[tripods68]

I'm clueless the answer on this one since we don't do our taxes

I know I should learn but don't have the time. I know our state tax refund in California is (just got 1099G) - but not sure about the federal tax refund?

[sweeps]

No, your tax refund is just that, an overpayment of taxes. It wouldn't make sense to pay taxes on the refund of that overpayment.

[tripods68]

California tax law does not make sense either.

Thanks sweeps

[Seeker]

Originally Posted by sweeps

No, your tax refund is just that, an overpayment of taxes. It wouldn't make sense to pay taxes on the refund of that overpayment.

To California:
The overpayment is an overpayment that you've not seen nor touched. It goes direct from your employeer to the State. Thus, any refund of overpaid dollars now represents new found "income" -- since it was refuted as taxable (it was returned), it's converted to income and will be taxed as income.

lol -- don't you just love logic ?

To Federal:
Sweeps is correct. Never been done in the USA as far as I know.

-----

But don't all state taxes do this with refunds? Not just California? Where you earn your income is where I would expect "overpayments" or "refund" to be converted to "income."

[sweeps]

Originally Posted by Seeker

To California:
The overpayment is an overpayment that you've not seen nor touched. It goes direct from your employeer to the State. Thus, any refund of overpaid dollars now represents new found "income" -- since it was refuted as taxable (it was returned), it's converted to income and will be taxed as income.

Are you sure about this? That would be really messed up if that is the case. I would purposely underwithhold to avoid that if that was true.

Paying taxes on your taxes -- good stuff.

[maat55]

Gosh, and I thought taxes were based on gross wages. Double taxation is alive and well.

[Seeker]

Originally Posted by sweeps

Are you sure about this? That would be really messed up if that is the case. I would purposely underwithhold to avoid that if that was true.

Paying taxes on your taxes -- good stuff.

Okay, guess I'm wrong -- wouldn't be the first time. I never really thought about it as double taxation.... but yes, income tax is based on gross income.

There's double taxation everywhere else -- for instance, anything gained from investing or saving is taxed again. So yes, double-taxation is alive and well.

Here's an article I found on the question: But I cannot translate it to English either

Taxability of state income tax refund

[tripods68]

Originally Posted by Seeker

Okay, guess I'm wrong -- wouldn't be the first time. I never really thought about it as double taxation.... but yes, income tax is based on gross income.

There's double taxation everywhere else -- for instance, anything gained from investing or saving is taxed again. So yes, double-taxation is alive and well.

Here's an article I found on the question: But I cannot translate it to English either

Taxability of state income tax refund

That article is very confusing

[safari]

Originally Posted by tripods68

That article is very confusing

I'll try to explain it in simple terms. The state tax refund for last year is only taxable if you itemized your federal return last year and subtracted the state taxes paid from your gross income. In other words, if you paid $5,000 in state taxes last year and your gross income was $50,000, when you itemize your deductions, you subtract $5,000 from $50,000, which makes your federal taxable income $45,000. So far so good. Then you do you state tax return for last year and it turns out that you overpaid state taxes, so instead of $5,000 you only owe $4,000 to the state. That results in $1,000 state tax refund. However, in your federal tax return you deducted the full $5,000, while in reality you only paid $4,000 in state taxes. That means that you owe the IRS taxes on that extra $1,000 that you deducted from your income, but then got back. Therefore, when you do your taxes for this year, you have to add the state tax refund you received for the previous year. However, if you didn't itemize your deductions on the federal tax return for the previous year, you don't need to add the state tax refund to your income for this year because you didn't deduct state taxes in the first place, but used a standard deduction instead. Hope this helps.

[MonkeyMama]

Agreed with safari. The state refund is only taxable if you took a deduction for it. That makes perfect sense. If you get a refund, then you weren't entitled to the deduction in the first place.

It's not quite so simple though. If your state SALES tax deduction would have been more then your state tax deduction, net of refund, then it won't necessarily all be taxable. Which is quite common, with the new state sales tax deduction alternative. Gets real complicated real fast.

[Like2Plan]

Originally Posted by Seeker

To California:
The overpayment is an overpayment that you've not seen nor touched. It goes direct from your employeer to the State. Thus, any refund of overpaid dollars now represents new found "income" -- since it was refuted as taxable (it was returned), it's converted to income and will be taxed as income.

lol -- don't you just love logic ?

To Federal:
Sweeps is correct. Never been done in the USA as far as I know.

-----

But don't all state taxes do this with refunds? Not just California? Where you earn your income is where I would expect "overpayments" or "refund" to be converted to "income."

Seeker,
You have to look at what happened the previous tax year. If you itemized your state taxes on your federal taxes, you received a deduction for the entire amount.
After you calculate your federal taxes, you figure your state taxes find that you get a refund--that refund amount (that you had already wrote off ) has to be added back into to your federal taxes next year.

If you didn't itemize the previous year, don't the instructions tell you to leave that off? Check out the bottom of page 9 on the instructions...


Now, if you are subject to AMT it becomes a lot more complicated. (AMT throws out the state tax deductions, but you could still get a refund check and have to report it as income the next year).

[Like2Plan]

Whoops.. Sorry, safari I didn't see your reply..

(What I meant to say is: What Safari said. )