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Is my state tax refund actually non-taxable?

Forum|Forum|6 years ago
February 13, 2020
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I filed 1040NR for previous year (2018) and deducted $10000 for state income tax (withhold amount is slightly over $10000, assume it's $10500). Since I was an non-resident alien, I can only claim itemized deduction, although standard deduction would be higher. I will file 1040 this year.

I got a refund (assume it's $2500) from California, and entered the value from form 1099-G in turbotax. I also selected that I used itemized deduction and some values from my 1040NR. Then it told me the refund is not taxable.

After reading this answer (https://ttlc.intuit.com/community/taxes/discussion/don-t-believe-determination-that-my-state-tax-refund-is-not-taxable/01/1100140) and the "State and Local Income Tax Refund Worksheet" in 1040 instructions, I believe after subtracting the $2500 from $10500, it would be $8000, so I have to pay tax on some of the refund ($10000-$8000=$2000).

I can manually choose in TurboTax that the refund is fully taxable, but I would have to pay more tax than necessary. Is my understanding correct?

TurboTax Premier Online

Best answer by ThomasM125

I agree with you. You should have deducted $8,000 of tax, but you deducted $10,000, so you have to add $2,000 back in this year. If you had deducted other state taxes, like property or sales taxes that made up the $10,000, then that would be different though.

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ThomasM125Answer

I agree with you. You should have deducted $8,000 of tax, but you deducted $10,000, so you have to add $2,000 back in this year. If you had deducted other state taxes, like property or sales taxes that made up the $10,000, then that would be different though.

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gqyhhhAuthor

Thanks. I think TurboTax also uses "State and Local Income Tax Refund Worksheet—Schedule 1, Line 1" (https://www.irs.gov/pub/irs-pdf/i1040gi.pdf p.83) to determine whether it's taxable. It just asked my filing status and just used the corresponding standard deduction ($12000), which is smaller than $10000. However I can't use standard deduction for 2018.

Do you know if I can enter the $2000 manually in Schedule 1, Line 1 (Taxable refunds, credits, or offsets of state and local income taxes), instead of mark this whole refund taxable? Or maybe I can just enter $2000 as the amount from 1099-G and mark it as fully taxable? Thanks.

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Psyblade

I had a similar question. We filed a joint married return in 2018. Up thru 2018, we always had our state tax refund added to our income. In 2019, however, turbotax said it was not taxable. I think the reason is that we paid state and local taxes of roughly 12000, but could only deduct 10,000. Since our state tax refund was only about $1,500, IE less than the $2,000 that we were not able to deduct in 2018, in affect the money is considered to have been taxable in 2018 and so does not have to be added to taxable income in 2019. I believe that is how it is working in our case.