• A state income tax refund resulting from a prior year tax return is reported on Form 1099-G. Part or all of this amount may be taxable in the year received; for example, a state income tax refund for the previous return may be taxable on the current federal return.
    • The refund amount is NOT taxable if there was no benefit to the taxpayer, in the prior year, from the overpayment of state taxes that resulted in a refund.
    • To accurately calculate the taxable amount, the taxpayer’s prior year federal tax return, or an IRS transcript of the return, MUST be available.
      • If the tax return or a transcript is not available, then the refund can be assumed to be not taxable only if it’s obvious the taxpayer took the standard deduction in the prior year. If it isn’t obvious, then either the entire amount of the refund must be treated as taxable or the return is out-of-scope.
  • CA process note: CA uses an abbreviated version of the normal Form 1099-G, with only boxes 1 through 3. 
  • Note:  If box 3 is not the preceding year (rare), the taxpayer received a state tax refund during the tax year for a return prior to the previous year. In that case, the current return is out-of-scope unless the refund is either wholly nontaxable or is treated as wholly taxable. Use the five criteria in the next bullet to determine if the refund is nontaxable. If it meets none of those criteria, then the taxpayer can either agree to treat it as fully taxable or will have to use something other than Tax-Aide to do the return.
  • Don’t enter the refund amount if any of the following are true (no action is required for Schedule 1 Line 1): 
    1. The taxpayer did not get a Form 1099-G, and (if available) the CA return for the prior year shows no state tax refund (CA Form 540, page 4, line 97).
    2. The taxpayer did not itemize in the prior year (there was no Schedule A for the federal return).
    3. The taxpayer did itemize in the prior year (there was a Schedule A), but used general sales tax (the box for line 5a is checked) rather than state and local income taxes. 
    4. The taxpayer did itemize in the prior year, but real estate taxes paid plus personal property taxes paid totaled $10,000 or more, the maximum allowed for state and local taxes of all types.
    5. The taxpayer did itemize in the prior year, and did deduct state and local income taxes, but this had no benefit because the following is true:
      • Line 11b, “Taxable income”, on the prior Form 1040 is zero, and still would be zero if either is true:
        • Sales tax had been deducted instead of state income tax.
        • The standard deduction had been taken on line 12 and the taxpayer had no unused QBI (line 13) or nonrefundable credits (lines 19 and 20). If it is not immediately clear whether there was unused QBI or nonrefundable credits in the prior year, it is best to follow the instructions below to determine the taxable amount. (For 2023, the standard deduction was $13,850 for single and MFS filers, $20,800 for HoH, and $27,700 for MFJ/QSS. Those 65 and older, and/or blind, got an additional $1,850 if not filing MFJ; for those filing MFJ, the potential increase was $1,500 per taxpayer/spouse.)
  • If the taxpayer has a Form 1099-G, and/or the prior state tax return shows a refund, and none of the conditions listed in the above paragraph are met, then determine how much of the refund is taxable.
    • If the return isn’t available, the taxpayer has the choice of assuming that all of the refund is taxable, or of getting a copy of the tax return (such as finding it at home) or a return transcript (check box 6a on Form 4506-T, Request for Transcript of Tax Return).
  • New:  TaxSlayer now includes any state refund in carryforward if used for itemizing on the prior return. 
    • Part of the calculation involves the amount of general sales tax that could have been claimed on Schedule A. If the electronic version of the prior tax return is available, it may include this number on the page [Deductions > Itemized Deductions > Taxes You Paid > Add Sales Tax Worksheet] or the PDF of the full printed return. Otherwise the sales tax must be looked up online, then entered in TaxSlayer. This IRS calculator is at apps.irs.gov/app/stdc/ .
    • Go to the State Refund Worksheet page [Income > Form 1099-G Box 2]; see Pub 4012 page D-20.
  • To calculate the taxable amount, use the Taxable Refund and Recovery Calculator at cotaxaide.org/tools/ (recommended) and enter the result in the “Bypass State Refund Worksheet” box.
    • It’s not recommended to use the TaxSlayer worksheet; it’s far too simplistic, and likely to determine too high a taxable amount.
  • Note for CA returns: If the taxpayer’s Final Settlement Statement from escrow shows CA income tax withheld from the sale, then the taxpayer must provide a completed CA Form 593. If they don’t have one, they must get a copy from their escrow agent before their CA return can be completed.
    • The taxpayer may receive a CA Form 593 even if there was no withholding (such as for the sale of a primary residence held in a trust). If Form 593 line 37 has no withholding, then don’t fill out this section in TaxSlayer.
    • In TaxSlayer, go to State Section > Payments > CA Real Estate Withholding (from Form 593).
    • Complete these sections using information from the paper form:
      • Remitter Information from Part I
      • Seller/Transferor Information from Part II
      • Escrow or Exchange Information from Parts II and VII
      • Preparer Information from the last line of the signature section.
    • The amount withheld appears on CA Form 540 line 73. The other data entered in the Form 593 screens doesn’t appear anywhere on the printed return; the Quality Reviewer must retrace the Counselor’s steps to look at each screen in this section, to verify the data was entered accurately.
    • If the taxpayer is itemizing on the federal return, and if the $10,000 cap for state and local taxes has not been reached, then another adjustment is needed [because the entry in the State Section is not carried to Schedule A Line 5a (Income Taxes)].
      • Go to the Payments - Other State Withholdings page [Federal > Payments & Estimates > Other State Withholdings], enter the amount of CA tax withheld, then pick any state other than CA (e.g. Alabama). This gets the amount to Schedule A without carrying it twice to CA Form 540.
      • Note: When starting the E-file section, TaxSlayer may offer a reminder that there is state withholding without a matching state return. Ignore the reminder.
    • If the CA return will be paper filed for any reason, attach a copy of Form 593 along with any other documents that show withholding.

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