How to resolve Lacerte diagnostic ref. 9350 - partial state refund benefit due to AMT

This article will help resolve the following informational diagnostic:

• In applying the AMT nonrefundable credits tax benefit rule to state income tax refunds, the program assumes that if there was any tax benefit received in 20YY by deducting the entire amount of state income taxes refunded, then the full amount of the refund (after accounting for other adjustments) is taxable. The program does not perform partial benefit tests. If only part of the income tax refunded yielded no tax benefit, enter the amount in "Refund with no tax benefit due to AMT or nonrefundable credit (screen 14.2, code 131) (ref. #9350)

Before you start

• Lacerte doesn't calculate partial benefit amounts. However, if there was any benefit to the taxpayer due to the inclusion of the AMT calculation, Lacerte will carry the full amount of the state refund into the current year tax program when client file is proforma'd.
• If the taxpayer didn't receive a benefit because of the AMT calculation, Lacerte won't carry the state refunded amount forward.
• While Lacerte will carry the refunded amount forward, it's your responsibility to adjust the refunded amount.

Follow these steps to resolve the diagnostic:

1. Go to Screen 14.2, State Tax Refunds, Unemployment Comp.
2. Select the State Refund Wksht button.
3. Scroll down to the Recomputed Tax Worksheet subsection.
4. Enter the Refund with no tax benefit due to AMT, nonrefundable credits, or 0% capital gain or qualified dividend rate (input sheet code 131).

To determine the no tax benefits:

1. Reduce the prior year Schedule A by the entire state refund.
2. Re-calculate the federal return using the reduced Schedule A.
   • If the total tax on the original return is the same as the tax on the newly calculated return with the reduced Schedule A, none of the refund is taxable because no benefit was received.
   • If the total tax on the newly recalculated return is more than the actual filed return, some benefit was received and some of the refund may be taxable.
3. If there is a difference, follow the steps above to enter the part of the refund that had no tax benefit. For example:
   • The original return had taxable income of $50,000 with total tax of $9,000.
   • The recalculated return has taxable income of $51,000 with total tax of $9,100.
   • $1,000 state tax refund.
   • A tax refund of $250 has total tax of $9,000.
   • A tax refund of $251 has total tax of $9,001.
   • $250 has no taxable effect and should be entered as shown above.

Additional information can be found in the Form 1040 instructions for Line 10 and IRS Pub. 525