Relay-Version: version B 2.10 5/3/83; site utzoo.UUCP
Posting-Version: version B 2.10.2 9/18/84 exptools; site ihuxk.UUCP
Path: utzoo!watmath!clyde!cbosgd!ihnp4!ihuxk!rs55611
From: rs55611@ihuxk.UUCP (Robert E. Schleicher)
Newsgroups: net.taxes
Subject: Re: Deducting State Taxes from the Feds
Message-ID: <1066@ihuxk.UUCP>
Date: Tue, 11-Feb-86 14:16:21 EST
Article-I.D.: ihuxk.1066
Posted: Tue Feb 11 14:16:21 1986
Date-Received: Wed, 12-Feb-86 08:33:07 EST
References: <5858@fortune.UUCP>
Organization: AT&T Bell Laboratories
Lines: 41

> 
>    I hope this is the way that I think, or else I'm out
> another $700.  In '83 on my itemized deductions, I dedcuted the
> State taxes that I actually paid, not the amount witheld. This
> means that out of $3k witheld, I only deducted the $1.5 owed.
> So as  see it, I have just paid Federal taxes on the remaining
> $1.5K.
> 
>    So, in '84 I did not claim the $1.5 refund from the State as
> income, or else I would pay Federal taxes on it again. I just got 
> a letter that says that they are upset that I did not claim it.
> 
>     Should I have deducted the entire witheld ammount in '83, and
> then claim the refund amount as income in '84?  I think I am 
> still O.K. on this, but I would like to know if anyone else has
> been caught up in this and knows the real story.
> 
> 					Thanks,   Jim
> 
What you did was correct, but not the usual way people handle this
situation, which probably accounts for the IRS letter.  The 1040
instructions for the line for reporting state tax refunds has
a mini-work-sheet which leads you to the same conclusion you
reached:

Since you only deducted 1.5k dollars last year, despite having 3k
withheld, you don't report the $1.5k refund as income this year.
(You only report refunds that had been deducted the previous year,
and thus reduced your taxes the previous year.)

The problem is, Your W-2 form last year showed state taxes withheld,
not what you actually owed (or, in this case, paid).  Also, your state 
presumably reported to the IRS (and to you, via some kind of 1099 form)
the refund amount you received this year.

All in all, you're in the clear, but would be better off if you deducted
everything that was withheld for state taxes, and then added your refund of
state taxes into next year's return.

Bob Schleicher
ihuxk!rs55611