1. State/Local Income Tax Refunds
Form 1040 – Line 10
Pub 4491 – Part 3 – Lesson 9
Pub 4012 – Page D – 9
Slide 8 referred to 2014 instead of 2015.
Slide 9 showed exemption amount of $8,100 instead of $8,000 for 2015.
Slide 12 showed a TaxSlayer worksheet. Amended to recommend worksheet at cotaxaide.org/tools
Deleted Slides (manual calculation)—not needed since we have access to cotaxaide.org/tools

2. The Interview Point of awareness From 2015 returns
Encourage counselors to ask probing questions
It is not “prying,” it is essential to an accurate return
NTTC Training – TY2016

3. State/Local Income Tax Refunds
Form 1099-G – State or local income tax refund
2015 only
NTTC Training – TY2016

4. State/Local Income Tax Refunds Interview
Limitation on Scope
Box 3 must be “2015” (not older years)*
Must have 2015 return if not all taxable
*Exceptions:
If taxpayer agrees 100% taxable
If taxpayer claimed standard deduction for all years (0% taxable)
If taxpayer claimed sales tax deduction for all years (0% taxable)
Emphasize
If taxpayer received a refund from a year prior to 2014, return is out of scope
Example of why:
Filed 2013 (standard deduction) and paid balance due in 2014
Filed 2014, itemized and claimed state income tax deduction (including bal due on 2013)
Filed amended 2013 and got state income tax refunded, received in 2015
Would need to test 2014 return for the taxable amount of the refund based on 2013 return – too complex
NTTC Training – TY2016

5. State/Local Income Tax Refunds
Tax benefit rule:
Taxable when refund received if it gave tax benefit in year deducted
Taxable amount is limited to amount that gave tax benefit
NTTC Training – TY2016

6. State/Local Income Tax Refunds
Tax benefit rule:
No benefit if standard deduction was used in 2015
No benefit if Sales Tax was deducted in 2015
No benefit if negative taxable income (Line 41 minus line 42) when stated as a positive number is more than the income tax deduction on 2015 Schedule A
Emphasize
If did not itemize, then no reduction in tax liability for 2015 from state income tax paid
If itemized and took sales tax deduction instead on income tax deduction, then no benefit on 2015 return from income tax paid
If taxable income after all deductions and exemptions was negative and that negative amount was more than the refund, then no benefit. That is, would not have paid any more federal tax if had not claimed that refund amount anyway.
NTTC Training – TY2016

7. Any Tax Benefit? Look at 2015 Form 1040 Page 2 Line 40
Standard deduction or itemized?
NTTC Training – TY2016

8. Any Tax Benefit?
Can’t remember last year’s standard deduction amounts?
Compare Line 40 to Sch A Line 29 total
6,293.
NTTC Training – TY2016

9. Any Tax Benefit?
Negative taxable income on Page 2 of 2015 Form 1040: Line 41 (1,234) Less line 42 -8,000 Total negative taxable (9,234) income Is refund less than $9,234?
Look at the prior year’s return for negative taxable income
NTTC Training – TY2016

10. State/Local Income Tax Refunds
Not taxable?
(sales tax or standard deduction or negative taxable income)
Take no action in TaxSlayer.
Note “not taxable” and why on the Intake sheet.
NTTC Training – TY2016

11. State/Local Income Tax Refunds
Possibly taxable?
TaxSlayer has worksheet to calculate tax benefit
Emphasize
If sales tax or standard deduction was claimed, enter nothing!
If refund is less than negative taxable income, enter nothing!
Select “Begin” ONLY if taxpayer BOTH itemized deductions AND deducted income tax.
NTTC Training – TY2016

12. State/Local Income Tax Refunds
Use worksheet at cotaxaide.org/tools and enter results here
NTTC Training – TY2016

13. State Tax Refund Worksheet
Must have 2015 federal return!
TaxSlayer asks several questions
Answer them with info from return
Open Page D-9
NTTC Training – TY2016

14. State Tax Refund—Income Tax Deduction Exceeded Sales Tax
If income tax deduction minus sales tax deduction is less than refund, only the difference is a tax benefit
NTTC Training – TY2016

15. State Tax Refund Worksheet
Most common error: forget to input sales tax that could have been deducted
Emphasize
Can go to IRS.gov, search sales tax calculator, which will compute sales tax per the table for a number of prior years
Can use instructions for Schedule A and pick sales tax from the table
NTTC Training – TY2016

16. Calculate Sales Tax Take AGI from 2015 F1040 Line 37
Add income not taxed (e.g. non-taxable SS, SSI, VA benefits)
Go to Sch A instructions, look up your state in sales tax tables for number of exemptions on 2015 return
Input in wksht
Instead, can go to IRS.gov, search sales tax calculator, which will compute sales tax per the tables for a number of prior years
NTTC Training – TY2016

17. State Tax Refund—Itemized Better than Standard Deduction
If itemized deduction minus standard deduction is less than refund, only the difference is a tax benefit
NTTC Training – TY2016

18. State Tax Refund—Negative Taxable Income
If the taxable income was negative, part or all of the income tax deduction may have produced no tax benefit
NTTC Training – TY2016

19. Unused Tax Credits in 2015?
Confirm if there were unused tax credits – look at 2015 tax return
Was tax after nonrefundable credits (Line 56) zero?
Note: TaxSlayer limits credits on Line 55 to total tax due on Line 47 so a zero on Line 55 does not mean every possible non-refundable credit was used, only enough to offset tax due.
NTTC Training – TY2016

20. State and Local Income Tax Refunds
TaxSlayer carries taxable portion of state and/or local income tax refund to 1040 Pg 1 Line 10
NTTC Training – TY2016

21. Quality Review – State/Local Income Tax Refunds
Confirm tax refund was only for 2015
Review prior year’s return
Itemized? Income tax deducted?
Negative taxable income?
Any unused credits?
Review entries in state tax refund worksheet
Emphasize
Highlight any peculiarities for your state
NTTC Training – TY2016

22. Taxpayer Summary – State/ Local Income Tax Refunds
Show taxpayer portion of refund that is taxable, if any
NTTC Training – TY2016

23. State And Local Income Tax Refunds
Questions?
Comments…
NTTC Training – TY2016