To find out how the taxable portion of state and local refunds is calculated:
- Go to Screen 14.2, State Tax Refunds, Unemployment Comp.
- Click on the State Refund Wksht in the left-hand navigation panel.
- Mark the Itemized in prior year box.
- If this box has not been checked, state income taxes gave no tax benefit in the prior year; therefore the entire state tax refund is nontaxable
- Additional entries on this screen are required to calculate the taxable portion of the state tax refund. See calculation below.
The worksheet is calculated as follows:
|Line||Instruction||Input Field Name on Screen 14.2 or [Calculation]|
|1||State and local income tax refunds (prior year)||Income tax refunds, credits or offsets (2)|
|2||Refunds attributable to post 12/31/20XX payments per IRS Pub. 525||Refunds attributable to post-20XX ES/extension payments|
|3||Net state and local income tax refunds||[Add lines 1 and 2]|
|4||State and local taxes paid from prior year Schedule A, line 5||State and local income taxes paid|
|5||Prior year allowable sales tax deduction||Allowed or allowable general sales tax deduction|
|6||Excess of income taxes deducted over sales taxes deducted||State and local income taxes paid less Allowed or allowable general sales tax deduction|
|7||Enter the smaller of line 3 or line 6||[Smaller of line 3 or line 6]|
|8||Itemized deductions from prior year Schedule A, line 29||Itemized deductions from Schedule A, line 29|
|9||Prior year recomputed itemized deductions (if phase out)|
|10||Prior year base standard deduction||Base Standard Deduction|
|11||Prior year add'l standard deduction for age/blindness||Number of age/blind exemptions|
|12||Prior year disaster loss / new motor vehicle deduction||New motor vehicle tax deduction|
|13||Prior year total standard deduction||[Add lines 10, 11, and 12]|
|14||Enter the larger of line 9 or line 13||[Larger of line 9 or line 13]|
|15||Subtract line 14 from line 8 (not less than 0)||[Line 8 minus Line 14]|
|16||Enter the smaller of line 7 or line 15||[Smaller of line 7 or line 15]|
|17||Negative taxable income (prior year)|
|18||Refund with no tax benefit due to AMT or non refundable credits||Refund with not tax benefit due to AMT, non refundable credits, or 0% capital gain or qualified dividend rate|
|19||State and local refunds taxable this year||[Add lines 16, 17, and 18]|
You cannot force the State Refund Worksheet to generate if the State Refund is nontaxable.
For more information, please review the IRS instructions for Form 1040, namely page 85.