jmood

Alternative Minimum Tax (AMT) was mentioned in another (healthcare and stock market) thread I'm presently following and since I've never understood it after all these years, I decided to read some more. Honestly, even reading the Wikipedia page about it, I didn't get it. Anyways, I was reading the following page about it, but what struck me was the following:

Understanding the Alternative Minimum Tax (AMT)
Under the regular IRS rules, you start with your gross income and subtract deductions like state taxes you paid, and exemptions like child credits. Eventually, you arrive at your taxable income.

What the what?! State taxes are a deductible in my federal tax? I've been filing taxes for so many years here now, and this has never been the case. Should I feel even more like an idiot?

JAJ

Alternative Minimum Tax only affects those with income above a certain level. If you use tax software, like TurboTax, it should calculate in the background whether AMT is an issue and if so, add the relevant forms to your tax return. State and local taxes are not deductible for AMT.

If AMT is lower than standard federal tax, you never see it, and if it's higher, you pay the difference.

jmood

Right, thank you.
But that wasn't the question. Sorry, my bad for talking about AMT so much and confusing you.

See this quote again, from the link I provided:
Under the regular IRS rules, you start with your gross income and subtract deductions like state taxes you paid, and exemptions like child credits. Eventually, you arrive at your taxable income.

This talks about regular tax and as I understand it, it says that state taxes become a deductible to calculate your taxable income for federal tax purposes.

So my question was: Really?


I don't think this happened on any of my prior tax returns which I prepared using the tax software. My state taxes never became deductible for federal tax. For starters, my state tax was never even calculated/determined before the federal return was completed.

Hotscot

What annoys me is that my tax refund is taxable.

JAJ

Really. State and local income and property taxes are normally deductible. However, this only applies if you itemize deductions. Not if you take the standard deduction.

Normally, your state tax deduction is based on your withholding plus any final payments. As someone else has said, IF you itemize, and then later on get a state tax refund, it may be taxable income.

jmood

If so, how come the tax software doesn't allow for it. I've never been asked if I want to itemize my state tax. Because if I wanted to then I should calculate my state tax first. But by default the tax software is for federal ignoring state.

Withholding what? Final payments of what?

JAJ

All tax software deals with this issue. Whether it was used correctly, is another question. You don't get asked about itemizing for state tax specifically. You should be asked about whether you wish to take the standard deduction or itemize on Schedule A.

So you need to look at your income tax return and see what you have done. Did you take the standard deduction or not?



Withholding of state tax (look at your W-2).
Final payments of state tax, following a state income tax return, if your state tax due was less than amounts withheld. Or instalments paid.

It sounds like you need your tax returns reviewed (and completed, in future) by a professional.

AdobePinon

You take the standard deduction unless you think you can itemize more dollars than the standard deduction is worth - then you file Schedule A. For most employed people, this kicks in when you have mortgage interest - it can be hard to find enough dollars on all the other stuff.

md95065

Assuming that the OP entered their income and withholding information correctly and answered the questions about potentially deductible expenses then the tax software *should* have figured out whether they were better off taking the standard deduction or itemizing and made the correct choice.

... but I agree that, if there is any doubt, then they would be well advised to have their returns reviewed ...

md95065

Well, depending on the state, you may well find that state tax alone is sufficient for it to be advantageous to itemize - that is certainly the case for me

jmood

I've always taken the standard deduction.

That said, I pay high state taxes (NY) plus I pay city taxes (NYC). I remember calculating what I could itemize and it being less than the standard deduction and hence taking the standard deduction, but I don't think I ever added my state tax into that calculation. I'll review the old returns later.

And what about city tax? Could I add new York City tax into my itemized federal deductions?

md95065

This has already been explained, but just to make sure that there is no misunderstanding, you need to be clear that the amount of state taxes that you can deduct on you Federal return is the amount that you actually paid in that tax year (through withholding and/or direct payments) - it is not the amount that your state tax return ultimately determines that you should have paid - so you don't need to do your state tax return first.

md95065

Yes. State taxes, local taxes, property taxes are all deductible.

jmood

Ah. No, I hadn't got that before. So I'm confused. The point of the pre-payment throughout the year is so that you don't have to pay everything at the end in one big lump sum. So what difference does it make?

I mean, is the point that taxes due to the state are deductible, or is the point that only taxes that have been pre-paid throughout the year to the state are deductible? The latter makes no sense. In which case, I don't understand what you're saying.

WAIT : Is the point about which tax year it gets paid to the state? If so, what you pay at the end of year say in April 2014 for your 2013 state tax would still be deductible from federal but deductible for the 2014 tax year and not 2013 which you would be preparing at that point. Is that it?

md95065

The amount of state taxes that are deductible on the Federal return is the amount that you actually paid to the state during the tax year (ie January through December) - not how much you should have paid.

If you didn't pay enough and you have to pay extra when you file your state taxes then that "extra" amount can be used as a Federal deduction in the tax year that you make the payment.

If you get a state tax refund for a year in which you deducted state taxes from your Federal return then you have to pay Federal taxes on that refund (because the deduction that you took the previous year was too large).

Simple isn't it ... not ...