Happy tax day

[T2K]

Twenty five or more years ago I decided that I was tired of the double taxation on my prior year overpayment of federal income taxes. I talked to the payroll department of my employer and got estimates of 0 to 10 dependents and adjusted accordingly. Thereafter I never received a federal refund much higher than the amount Marvel posted above(his being a payment).

I read where as of late February the average refund of tax overpayment thus far for year 2014 was over $3000.

Why would anyone intentionally over pay taxes so that they could pay taxes on the overpayment the following year?

Keith

[oldtimer]

You don't pay taxes on the overpayment.  You pay what you owe and if you overpay you get it back.  This refund is not considered income for the next year.  At todays interest rates you are not missing much by over paying, unless you are such a genius that those few hundred dollars would have been turned into thousands.

[Paducah Home Theater]

Why would anyone intentionally over pay taxes so that they could pay taxes on the overpayment the following year?

Yeah you're not paying extra. At the end of it all its the same amount of money, only difference is who gets to collect interest or use it for other investments during the year.

However, not really. If it is off enough you'll get slapped with a penalty and interest if you owe too much at the end of the year.

[Paducah Home Theater]

I just realized that you could work two full time minimum wage jobs, 80 hours a week, save every bit of it, and that still wouldn't be enough to cover my tax bill from last year. Makes me sick thinking about it.
 

[oldtimer]

Excellent point for how much better off you are than them.

[derrickdj1]

Why would anyone intentionally over pay taxes so that they could pay taxes on the overpayment the following year?

 

You don't pay taxes on the overpayment but, you are letting the government use you money kinda for a year with no interest.  That is cold hard cash that could have been available for other things you may need.

 

The US was established in part to stop double taxation from Great Britain/England and has since taxed every thing that they can.  I am not sure as citizens if we are better off with this system of taxes(local, state and federal).

[oldtimer]

Get English citizenship and find out.  Go live there a while.  You will be back.

[Ceptorman]

Taxes are an odd thing. My highschool age daughter works at a restaurant. There's a 25 year old girl there with 2 kids probably making $14k-$16k a year. She struggles. She just got her tax check back, with fed and state, she received over $8k back. With all her credits and earned income, she gets over half back of what she makes. 

[oldtimer]

It sounds like she is being over withheld.  16K is 16K.  You  don't get more than you earn.

Edited April 16, 2015 by oldtimer

[Ceptorman]

It sounds like she is being over withheld.  16K is 16K.  You  don't get more than you earn.

With 3 dependents and a $9 an hour job, I'll bet she doesn't pay much. But getting 8k back is a huge benefit to her.

[oldtimer]

Of course.  But the key verbage here is "back."

[muel]

uhh... I'm wondering if with credits and all if she isn't actually getting back more than she ever paid.  

[muel]

I just realized that you could work two full time minimum wage jobs, 80 hours a week, save every bit of it, and that still wouldn't be enough to cover my tax bill from last year. Makes me sick thinking about it.

 

 

 

You need to find some deductions! 

[oldtimer]

Try it by filling out the form.  If she is, then that's exactly what is meant by corporate welfare.  Corporations pay their workers so little that the rest of us pick up the tab.  Most of the major fast food corporations fall into this category.

[Paducah Home Theater]

You need to find some deductions! 

 

I had all kinds of them.  

[oldtimer]

If you owed 31, 200 in taxes with deductions I struggle to understand your complaint.

[Fjd]

 

Why would anyone intentionally over pay taxes so that they could pay taxes on the overpayment the following year?

 

You don't pay taxes on the overpayment but, you are letting the government use you money kinda for a year with no interest.  That is cold hard cash that could have been available for other things you may need.

 

The US was established in part to stop double taxation from Great Britain/England and has since taxed every thing that they can.  I am not sure as citizens if we are better off with this system of taxes(local, state and federal).

 

 

 

 

I find that many people do not necessarily take the time to differentiate between the IRS federal tax withholdings, state income tax withholdings and local income tax withholdings and tend to generalize with statements about paying taxes on a tax refund amount and claim they were double taxed.

 

The most common situations are related to people that itemize deductions on Schedule A for their federal return and each itemized deduction reduces the IRS “taxable income” amounts that ultimately are taxed and lowers the overall Federal tax due calculation, for which the estimated payments of state income tax is one of the Schedule A itemized deductions subject to recovery (in the form of an overpayment refund) of a portion of that amount in a later period.

 

It would appear that the "double taxation" people may not necessarily be making the connection that they actually paid less federal tax to the IRs than they should have because they deducted this portion as non-taxable income, then got it back as a State income tax refund the following year.

 

However, note that a state tax refund is not from the IRS but from the State.  If a person itemized and deducted on IRS Schedule A the amount of State income taxes that they had actually paid this year then they have reduced their IRS Federal taxable income by that amount.

 

Along with the State income taxes paid back in form of a refund from the state; the state also reports this amount that you now owe federal taxes on with the 1099-G form (State Income Tax Refund to allow for IRS tracking and evaluation). This refund is always paid to you in the next year, or maybe two years later depending on how late a person filed their State Return.

 

The year, in which the person receives this State income tax refund, the IRS is claiming that you had already reduced your IRS Federal taxable income by part of the refund amount; therefore, they basically want you to now report the refund on a “cash basis” as taxable income in the year the State tax refund was actually received.  

 

The good thing to note is that your State will not tax the State income tax refund that they just sent.

 

If a person takes the "standard deduction" and does not itemize the amount of State income tax withheld as a Schedule A deduction, then they don’t claim it as income in the following year and don’t get taxed on it at the Federal level.

 

Given all of the above, there are some situations where sometimes a person’s total State income tax refund is taxable and other quirky situations where sometimes only part of the State income tax refund is taxable.  Personally, I find it much easier to use tax software to perform that calculation for my tax returns than to work it out myself.

 

Here is the link to Publication 525 and an excerpt from the “recovery” section that includes State income tax refunds.

 

 

 

IRS Publication 525

http://www.irs.gov/publications/p525/ar02.html#en_US_2014_publink1000229342

 

Recoveries

A recovery is a return of an amount you deducted or took a credit for in an earlier year. The most common recoveries are refunds, reimbursements, and rebates of itemized deductions. You also may have recoveries of non-itemized deductions (such as payments on previously deducted bad debts) and recoveries of items for which you previously claimed a tax credit.

 

Tax benefit rule. You must include a recovery in your income in the year you receive it up to the amount by which the deduction or credit you took for the recovered amount reduced your tax in the earlier year. For this purpose, any increase to an amount carried over to the current year that resulted from the deduction or credit is considered to have reduced your tax in the earlier year.

 

Federal income tax refund. Refunds of federal income taxes are not included in your income because they are never allowed as a deduction from income.

 

State tax refund. If you received a state or local income tax refund (or credit or offset) in 2014, you generally must include it in income if you deducted the tax in an earlier year. The payer should send Form 1099-G, Certain Government Payments, to you by February 2, 2015. The IRS also will receive a copy of the Form 1099-G. If you file Form 1040, use the worksheet in the 2014 Form 1040 instructions for line 10 to figure the amount (if any) to include in your income.

 

If you could choose to deduct for a tax year either:

• State and local income taxes, or

• State and local general sales taxes, then

the maximum refund that you may have to include in income is limited to the excess of the tax you chose to deduct for that year over the tax you did not choose to deduct for that year.

 

Example 1. For 2013 you can choose an $11,000 state income tax deduction or a $10,000 state general sales tax deduction. You choose to deduct the state income tax. In 2014 you receive a $2,500 state income tax refund. The maximum refund that you may have to include in income is $1,000, since you could have deducted $10,000 in state general sales tax.

 

Example 2. For 2013 you can choose an $11,500 state general sales tax deduction based on actual expenses or an $11,200 state income tax deduction. You choose to deduct the general sales tax deduction. In 2014 you return an item you had purchased and receive a $500 sales tax refund. In 2014 you also receive a $1,500 state income tax refund. The maximum refund that you may have to include in income is $500, since it is less than the excess of the tax deducted ($11,500) over the tax you did not choose to deduct ($11,200 − $1,500 = $9,700). Since you did not choose to deduct the state income tax, you do not include the state income tax refund in income.

 

Mortgage interest refund. If you received a refund or credit in 2014 of mortgage interest paid in an earlier year, the amount should be shown in box 3 of your Form 1098, Mortgage Interest Statement. Do not subtract the refund amount from the interest you paid in 2014. You may have to include it in your income under the rules explained in the following discussions.

 

Interest on recovery. Interest on any of the amounts you recover must be reported as interest income in the year received. For example, report any interest you received on state or local income tax refunds on Form 1040, line 8a or Form 1040NR, line 9a.

 

Recovery and expense in same year. If the refund or other recovery and the expense occur in the same year, the recovery reduces the deduction or credit and is not reported as income.

 

Recovery for 2 or more years. If you receive a refund or other recovery that is for amounts you paid in 2 or more separate years, you must allocate, on a pro rata basis, the recovered amount between the years in which you paid it. This allocation is necessary to determine the amount of recovery from any earlier years and to determine the amount, if any, of your allowable deduction for this item for the current year.

 

Example.

You paid 2013 estimated state income tax of $4,000 in four equal payments. You made your fourth payment in January 2014. You had no state income tax withheld during 2013. In 2014, you received a $400 tax refund based on your 2013 state income tax return. You claimed itemized deductions each year on Schedule A (Form 1040).

You must allocate the $400 refund between 2013 and 2014, the years in which you paid the tax on which the refund is based. You paid 75% ($3,000 ÷ $4,000) of the estimated tax in 2013, so 75% of the $400 refund, or $300, is for amounts you paid in 2013 and is a recovery item. If all of the $300 is a taxable recovery item, you will include $300 on Form 1040, line 10, for 2014, and attach a copy of your computation showing why that amount is less than the amount shown on the Form 1099-G you received from the state.

The balance ($100) of the $400 refund is for your January 2014 estimated tax payment. When you figure your deduction for state and local income taxes paid during 2014, you will reduce the $1,000 paid in January by $100. Your deduction for state and local income taxes paid during 2014 will include the January net amount of $900 ($1,000 − $100), plus any estimated state income taxes paid in 2014 for 2014, and any state income tax withheld during 2014.

 

Joint state or local income tax return. If you filed a joint state or local income tax return in an earlier year and you are not filing a joint Form 1040 with the same person for 2014, any refund of a deduction claimed on that state or local income tax return must be allocated to the person that paid the expense. If both persons paid a portion of the expense, allocate the refund based on your individual portion. For example, if you paid 25% of the expense, then you would use 25% of the refund to figure if you must include any portion of the refund in your income.

 

Registered domestic partners (RDPs) domiciled in community property states. For the rules that apply to RDPs who are domiciled in community property states, see Publication 555, Community Property, and Form 8958, Allocation of Tax Amounts Between Certain Individuals in Community Property States.

 

Deductions not itemized. If you did not itemize deductions for the year for which you received the recovery of an expense that was deductible only if you itemized, do not include any of the recovery amount in your income.

 

Example.

You claimed the standard deduction on your 2013 federal income tax return. In 2014 you received a refund of your 2013 state income tax. Do not report any of the refund as income because you did not itemize deductions for 2013.

Itemized Deduction Recoveries

 

The following discussion explains how to determine the amount to include in your income from a recovery of an amount deducted in an earlier year as an itemized deduction. However, you generally do not need to use this discussion if you file Form 1040 and the recovery is for state or local income taxes paid in 2013. Instead, use the worksheet in the 2014 Form 1040 instructions for line 10 to figure the amount (if any) to include in your income.

You cannot use the Form 1040 worksheet and must use this discussion if you are a nonresident alien (discussed later) or any of the following statements are true.

1. You received a refund in 2014 that is for a tax year other than 2013.

2. You received a refund other than an income tax refund, such as a general sales tax or real property tax refund, in 2014 of an amount deducted or credit claimed in an earlier year.

3. The amount on your 2013 Form 1040, line 42 was more than the amount on your 2013 Form 1040, line 41.

4. You had taxable income on your 2013 Form 1040, line 43, but no tax on your Form 1040, line 44, because of the 0% tax rate on net capital gain and qualified dividends in certain situations.

5. Your 2013 state and local income tax refund is more than your 2013 state and local income tax deduction minus the amount you could have deducted as your 2013 state and local general sales taxes.

6. You made your last payment of 2013 estimated state or local income tax in 2014.

7. You owed alternative minimum tax in 2013.

8. You could not use the full amount of credits you were entitled to in 2013 because the total credits were more than the amount shown on your 2013 Form 1040, line 46.

9. You could be claimed as a dependent by someone else in 2013.

10. You received a refund because of a jointly-filed state or local income tax return, but you are not filing a joint 2014 Form 1040 with the same person.

 

 

[Paducah Home Theater]

If you owed 31, 200 in taxes with deductions I struggle to understand your complaint.

 

Well, that's money that could have been spent on hookers and blow.  Gotta have your priorities straight you know.  

 

Biggest thing that sucks for me is the self employment tax.  Basically figure out your normal taxes then you have 15.3% more tax on top of that.  Most people's effective rate isn't even that.  

Edited April 16, 2015 by MetropolisLakeOutfitters

[oldtimer]

I don't envy you state income tax people.  FFS move!

[oldtimer]

Some morons might even use it to buy idler wheel turntables!  Hookers and blow---way better.