Why does the IRS tax my state income tax return?
Why does the IRS make me list my state income tax return from the previous year as income when they taxed my income from that year once already? I didn’t increase my income when I overpaid the state.
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August 24th, 2010 at 5:29 am
Because it was used as a deduction the year before.
August 24th, 2010 at 5:41 am
If you didn’t itemize (or used sales tax) it last year, it’s not income this year.
August 24th, 2010 at 5:54 am
You only list it as income if you took a Federal deduction for state income taxes LAST year (2008). If you didn’t do that, just ignore it.
August 24th, 2010 at 6:06 am
The only reason you need to list your state income tax refund is if you claimed a state income tax deduction in the previous year. If you did not claim this deduction, you do not need to claim your refund as income.
If you did claim this deduction, then you did not pay tax on what was withheld from your paycheck. The IRS is now taxing the portion that you originally excluded from income but then received back as income.
August 24th, 2010 at 6:43 am
Did you itemize deductions on your Federal return last year?
Your prior year state income tax refund counts as income *this*year* if you deducted state income tax on your Federal return *last*year*.
If you took the standard deduction last year, your state income tax refund is not taxable income.
August 24th, 2010 at 6:46 am
Because you deducted your withholding and it was less than what you owed. Taxing the refund evens the score.