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Wendy Reed
Wendy Reed, Enrolled Agent
Category: Tax
Satisfied Customers: 3346
Experience:  15+ years tax preparation and tax advice.
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A client overpaid 2008 state income tax by $3000...

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A client overpaid 2008 state income tax by $2000, and applied the full overpayment to 2009 state tax. State tax return for 2008 was prepared in 2011. The client itemized in 2008 and deducted state income taxes on the federal tax return for 2008.


I expect that 2008 refund will be reported on 1099-G for 2011 and will be included into 2011 taxable income (based on the corresponding worksheet) - please confirm.


The main question is how to treat overpayment applied to 2009 state tax - for deduction purposes - should it be deducted on the schedule A for 2009 (the year it was applied) or 2011 (the year the tax return was filed)? Seems I can't find any IRS authority, but TPS treats it as a deduction for 2009 that looks strange because the money are deducted even before they were constructively received.

Thank you for giving me the opportunity to assist you. I will give the best answer that I can with the information provided.


Hello, you are correct that if the cllient itemizes in 2008 and deducts his state tax, then gets a refund, the year that he gets the refund will be when he recognizes the income because that is when it is paid.


For deduction purposes, the state tax paid is deducted in the year paid, not the year that it corresponds to--In this case, it would also be 2011, presuming that the 2008 refund is applied to the 2009 tax in 2011.


You cannot deduct it on the 2009 return because it wasn't paid in 2009. TPS doesn't know the date that the return was paid, it assumes 2008 was filed timely. You will have to manually remove this from the 2009 return so it doesn't deduct, and add it to the 2011 return on schedule A


It is the same as if the client was making estimated payments to the state. If he made 4 timely estimated tax payments of $200 for tax year 2010, $200 in april 2010, $200 in June 2010, $200 September 2010, and $200 in January of 2011, then only $600 of those estimated state tax payments are deductible in 2010. The remaining $200 of tax

would be deducted in 2011, when paid.

Hope this helps...let me know if you still need assistance.

Customer: replied 5 years ago.
I had asked a similar question (using a slightly different example) and was told the following by another expert. I think this differs from your response. Can you help me reconcile this? I cannot find any IRS authority.

"The year in which you are actually paying the tax is the 1st day of the year following the return year. Thus a refund for 2004 which is credited to 2005 is considered as paid on January 1, 2005 regardless if the return was actually filed several years later. This is cash basis. You paid out the money back then. The income resulting from this is not "received" (through the application of the constructive receipt concept) until the return is filed.The IRS documentation for this can be found in Publication 17, beginning on Page 89"

I have read this question.


I understand what the expert is telling, you, that the tax payment is considered to be made Jan 1, 2005--regardless of the year that the return is filed. This I will have to disagree with, because even though the tax was withheld and technically the state had access to it during the year it was withheld, it is not clear whether there is a refund at this point to apply to 2005 since no 2004 tax return was filed. If there was a tax liability in 2005, and the state began to bill the person penalties and interest, and the person eventually did their 2004 return and applied the 2004 refund to 2005, you can bet the state will not go backwards and wipe out the penalties and interest on the 2005 tax liability, they will only stop the interest and penalties when the return is filed and it is confirmed that there is a refund to apply to 2005.


Let's take another look at constructive receipt. The taxpayer may choose to either get the refund or apply it to the future tax year. Since the taxpayer has not filed a return, the taxpayer has no receipt of the refund, so he has no way to designate it to year 2005. Until he actually files the return and a refund is confirmed and applied the other tax year, the tax is not considered paid.


I apologize that I can find no authority or example to show this, but this is how I would handle it if it was my own return or a client's return.

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