Asked by e
In Tax Year 2024, Olaf received a refund from the Franchise Tax Board for the amount of state tax that he overpaid in 2023. He was able to reduce his 2023 federal tax liability by itemizing and claiming a deduction for state and local income taxes paid that year. How will all or part of the state tax refund be reported on his 2024 federal and California tax returns?
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Short answer
- Federal (2024): Olaf must report the 2024 Form 1099‑G refund on his 2024 federal return only to the extent the 2023 deduction for state income taxes produced a tax benefit. In other words, the refund is taxable to the extent it reduced his 2023 federal tax. Use the Tax Benefit/Recovery of Deduction worksheet (IRS Pub. 525 / 1040 instructions) to compute the taxable portion. If he took the standard deduction in 2023 or the state tax deduction produced no federal tax benefit (e.g., limited by AMT or SALT cap), none of the refund is taxable federally.
- California (2024): A California state income tax refund is not taxable to California. If Olaf was required to include any of the refund in federal income, he must remove (subtract) that amount on his California return (Form 540 Schedule CA) so it is not taxed by California.
What Olaf should do
1. Wait for Form 1099‑G from the Franchise Tax Board showing the refund.
2. On the 2024 federal return, use the IRS worksheet (Publication 525 or the Recovery of Deduction worksheet in the 1040 instructions) to determine how much of the refund, if any, is taxable and report that amount on the appropriate line (other income) of the 2024 federal return.
3. On the 2024 California return, if he included any of the refund in federal AGI, subtract that amount on Schedule CA (Form 540) so it is not included in California taxable income.
If you want, tell me Olaf’s 2023 numbers (itemized deductions, amount of state tax deducted, whether he would have used the standard deduction, whether AMT applied) and I’ll compute exactly how much of the $2024 refund is taxable federally and how to enter it on both returns.
- Federal (2024): Olaf must report the 2024 Form 1099‑G refund on his 2024 federal return only to the extent the 2023 deduction for state income taxes produced a tax benefit. In other words, the refund is taxable to the extent it reduced his 2023 federal tax. Use the Tax Benefit/Recovery of Deduction worksheet (IRS Pub. 525 / 1040 instructions) to compute the taxable portion. If he took the standard deduction in 2023 or the state tax deduction produced no federal tax benefit (e.g., limited by AMT or SALT cap), none of the refund is taxable federally.
- California (2024): A California state income tax refund is not taxable to California. If Olaf was required to include any of the refund in federal income, he must remove (subtract) that amount on his California return (Form 540 Schedule CA) so it is not taxed by California.
What Olaf should do
1. Wait for Form 1099‑G from the Franchise Tax Board showing the refund.
2. On the 2024 federal return, use the IRS worksheet (Publication 525 or the Recovery of Deduction worksheet in the 1040 instructions) to determine how much of the refund, if any, is taxable and report that amount on the appropriate line (other income) of the 2024 federal return.
3. On the 2024 California return, if he included any of the refund in federal AGI, subtract that amount on Schedule CA (Form 540) so it is not included in California taxable income.
If you want, tell me Olaf’s 2023 numbers (itemized deductions, amount of state tax deducted, whether he would have used the standard deduction, whether AMT applied) and I’ll compute exactly how much of the $2024 refund is taxable federally and how to enter it on both returns.
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