Overpaying State Income Tax and 1099-G

Overpaying State Income Tax and 1099-G

Ventura County, CA · Member since 2010 · 47 posts · 16 votes

If one overpays the state income tax, they receive a 1099-G the following year for the refund amount. This makes sense since  you were able to deduct all that was deducted rather than just what was ultimately owed. If your highest tax bracket didn't change from one year to another,  it is pretty much a wash. 

However, now that the state income tax is limited, you may not be able to deduct all the state income that was deducted. If you then receive a 1099-G, you will be including income that was not deducted the previous year. Let me use an example to hopefully make clear what I am trying to say (Property tax kept out of this for simplification)

2018 - total state income deducted = $12,000. You are able to deduct only $10,000 for the 2018 tax year. After you complete your state returns, it is determined that the state tax due is $11,000.   You overpaid by $1,000 and that $1,000 is given to you as a refund. If we are playing by the old rules, you will receive a 1099-G for $1,000 to be included as income for 2019 tax year. Did you just get hosed? You paid $11,000 in state taxes, deducted $10,000 in 2018, and received a 1099-G for $1,000 (which will be added to your income next year). 

Let's say you only had $10,000 deducted for state taxes. You deduct the entire $10,000. Turns out you owe an additional $1,000. That's fine, you write a check to the state for $1,000.  You are still paying the same $11,000 to the state as the previous example but next year you don't get the $1,000 1099-G. It sounds to me like you come out ahead this way. If this is right, lesson learned, don't overpay state income taxes. 

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Logan AllecBusiness Member
Accountant · Los Angeles, CA · Member since 2014 · 1k+ posts · 980 votes
8y

@Jim T. You only include the 1099-G amount into income to the extent you received a tax benefit for it.  This has always been the rule.

Where it came into play most often was for taxpayers subject to the AMT.  Many taxpayers subject to the AMT did not receive any benefit for state taxes paid, or only a partial benefit, in the year paid, and so their 1099-G amount would not be included in income, or only partially included in income, in the year the refund was received.

It will be a similar story for those in the situation that you describe.

Tax preparers, if they're not lazy, should not blindly pick up the 1099-G amount as income but should go back to determine exactly how much benefit the taxpayer received for state taxes paid.  Problem is that many tax preparers are lazy and miss this, and many DIY'ers miss this as well and end up paying tax on something they don't have to, i.e., the portion of their refund that they never received a tax benefit on to begin with.

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  • Logan AllecBusiness Member
    Accountant · Los Angeles, CA · Member since 2014 · 1k+ posts · 980 votes
    8y

    @Jim T. You only include the 1099-G amount into income to the extent you received a tax benefit for it.  This has always been the rule.

    Where it came into play most often was for taxpayers subject to the AMT.  Many taxpayers subject to the AMT did not receive any benefit for state taxes paid, or only a partial benefit, in the year paid, and so their 1099-G amount would not be included in income, or only partially included in income, in the year the refund was received.

    It will be a similar story for those in the situation that you describe.

    Tax preparers, if they're not lazy, should not blindly pick up the 1099-G amount as income but should go back to determine exactly how much benefit the taxpayer received for state taxes paid.  Problem is that many tax preparers are lazy and miss this, and many DIY'ers miss this as well and end up paying tax on something they don't have to, i.e., the portion of their refund that they never received a tax benefit on to begin with.

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  • Ventura County, CA · Member since 2010 · 47 posts · 16 votes
    8y

    Thank you  @Logan Allec , very well explained. 

    @Logan Allec

  • Basit SiddiqiBusiness Member
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    8y

    @Jim T.


    Logan is correct in that you only report the state income tax refund if you received a benefit from deducting state and local taxes.

    Instances where you don't benefit 100% from deducting state and local taxes

    example 1

    State and local taxes on Schedule A is $11,000(only itemized deduction)
    Standard deduction is $10,600
    You only received a benefit of deducting $400 of state and local taxes. Therefore 100% of the refund wont be taxable

    Example 2
    You are in AMT.
    State and local taxes are not allowed as a deduction under the AMT Tax system. Therefore you have to see how much AMT Tax you paid and see if you got a benefit.

    It will be the same case going forward now that State income taxes and property taxes are limited to $10,000 as an itemized deduction. I would have to assume that it will be more difficult to calculate going forward. But more opportunities for state refunds not to be taxable.

  • Michael PlaksPro Member
    Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
    8y

    @Jim T.

    @Logan Allec provided an outstanding explanation, and @Basit Siddiqi added couple good points.

    I just want to frame the bigger picture: the new law does NOT hurt ("hose", using your word) people who receive 1099-G for prior overpayment. 

    The worst possible case is that you're forced to return some savings that you received in a prior year. But you are never returning more than you have received.

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