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We are about to settle a lawsuit regarding an interpleder…

Customer Question
We are about to...

We are about to settle a lawsuit regarding an interpleder with a bank and someone who self-dealt themselves a huge portion of an IRA. This person lives in Maine and is subject to Maine State income tax.

Accountant's Assistant: The Accountant will know how to help. Please tell me more, so we can help you best.

His Federal income tax bracket is 28% His Maine Tax is about 7%.

Accountant's Assistant: Is there anything else the Accountant should be aware of?

Is the 7% of Maine tax fully refundable on his 2017 federal tax?

Submitted: 6 months ago.Category: Tax
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Customer reply replied 6 months ago
The lawyers want us to lessen our payout 35% of our settlement to the defendant because of combined 7% Maine state income tax plus 28% federal income tax. I'm saying we should only lesson the pay out to us by 28% because the Maine tax is fully refundable from the federal tax on his 1040 and schedule A of the this tax year 2017.
Answered in 19 minutes by:
8/2/2017
Tax Professional: emc011075, Tax adviser replied 6 months ago
emc011075
emc011075, Tax adviser
Category: Tax
Satisfied Customers: 3,388
Experience: IRS licensed Enrolled Agent and tax instructor
Verified

Hi. My name is ***** ***** I will be happy to help you.

A deduction is not a credit. The deduction of state taxes on Schedule A is not fully refundable. A deduction only reduces your taxable income but not bellow 0. For instance, $1000 deduction in 28% tax bracket will reduce your tax liability by $280, NOT $1000. There are another things to consider. Does the person itemize his deduction or is he claiming standard deduction? If he does not have enough to itemize he will not benefit from the deduction in any way.

Until the person files his tax return there's no way to tell how the deduction affect is his taxes. The most benefit he will receive (assuming 28% is his effective tax rate, not tax bracket), will be $28 on every $100 he can deduct, if he can deduct it.

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Tax Professional: emc011075, Tax adviser replied 6 months ago

I see you read my respond. Do you have any questions? Is there anything else I can help you with today?

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