How to perform a complex recomputation of return recovery exclusion

This article will assist you with computing the values you need to enter on the State and Local Income Tax Refund Worksheet, Part V. It'll also walk you through the complex recomputation of the 2023 return recovery exclusion.

What is a recovery?

A "recovery" is a refund of state income tax deducted in the prior year. IRS IRS Pub. 525 indicates that:

"You must include a recovery in your income in the year you receive it up to the amount by which the deduction you took for the recovered amount reduced your tax in the earlier year."

What if the recovery doesn't reduce the client's tax?

Due to the Alternative Minimum Tax, some or all of the deduction for state income tax may not have reduced the client's tax. IRS Pub. 525 gives the following instructions:

"If you were subject to the Alternative Minimum Tax in the year of the deduction, you will have to recomputed your tax for the earlier year to determine if the recovery must be included in your income. This will require a recomputation of your regular tax ... and a recomputation of your Alternative Minimum Tax.

If inclusion of the recovery doesn't change your total tax, you don't include the recovery in your income.

However, if your total tax increases by any amount, you received a tax benefit from the deduction and you must include the recovery in your income up to the amount of the deduction that reduced your tax in the earlier year."

How do I recompute the prior-year return?

It's necessary to recompute the prior-year return after reducing the amount of the state income tax deduction by the amount of the recovery. It may also be necessary to vary the state income tax deduction to determine what portion reduced tax. Use the steps below to do this.

Follow these steps to recompute the prior-year return for ProSeries 2015 and later:

1. Go to the State Tax Refund Worksheet.
2. Scroll down to Part II - Recovery Amount.
3. Make a note of the Recovery Amount on Line 6 for the current-year program.
4. Open the prior-year tax return.
5. Open the Computation of Recovery Exclusion For State Income Tax Deduction.
   • To do this, do the following:
     1. Hold down F6 on your keyboard to open the Open Forms window.
     2. Type in "A" to locate the Schedule A.
     3. Under Schedule A, locate Recovery Excl.
     4. Select Recovery Excl and click OK to open the worksheet.
6. Check Yes for Box 2 - Is 2023 recovery amount (2022 state income tax refund amt.) known?
7. Enter the recovery amount from step 3 on Line 3.
8. Mark the checkbox labeled Check to compute Parts II, III and IV, as applicable.
9. Scroll down to Part IV - Recomputation of 2022 Tax Varying Deduction for State Income Tax.
10. Find the line with the * to the right of the number in column (a) No.
11. Make a note of the (d) Regular Tax and (e) Alternative Minimum Tax plus Excess Adv Prem Tax Credit amounts from the grid.
12. Enter the amounts from step 11 into the current year State Tax Refund Worksheet on Line 19 and Line 21.