This morning on the radio news channel they had a brief article about how the tax refunds would be going out soon. Check their web site for the date of yours. But they mentioned that states are still determining if they are going to tax our refund.
Huh? How can states tax a refund? Does this mean that states will consider this an income rather than a refund?
No, D-boy, states cannot do “pretty much whatever they want”. There is a whole list of powers delgated to the Federal Government and the States. Here is a copy of the Constitution of the United States for reference.
I very seriously doubt any states are thinking of taxing your refund which cannot be considered income by any stretch of the term. Can you provide some information explaining this?
Some states allow for a deduction of federal income taxes paid. If your federal taxes go down (say, by $600), your deductions will be lower and your state income tax liability would increase (say, by the state tax rate times $600). I believe some of these states have taken action to prevent this from occurring.
In other states, the state income tax is simply a percentage of federal income tax liability. In those states, your state income tax liability would go down as a result of the federal tax cut.
Unless you live in Rhode Island, which I believe has taken action to tie their state income tax to federal tax liability as it was under pre-tax cut federal law. Is this a tax increase???
IIRC, some states allow you to deduct the amount paid in federal tax from your gross income before calculating state tax owed. In those cases, refunds can be taxable in the year received if they change the amount deducted in the year the tax was paid. For states which do tax normal refunds, taxing these mid-year refunds would be no different.
The point is that this is a refund on tax paid and consequently modifies calculations for the year you thought you paid more. It’s not a grant, gift or charity which would be unrelated to previous tax calculations.
The money has already been taxed, so it can’t be taxed again.
The only possibility would be if the state allowed you to deduct your Federal Tax payments on your state return (the Federal form lets you deduct state tax payments*). In that case, the money would not have been taxed and you’d have to pay. I don’t know of any state that does this, however.
*You can deduct the amount of tax withheld from you, but if you get a state tax refund, it’s considered income for Federal purposes and you need to report it the next year.
By my count, AL, IA, LA, ND, and OK allow a full deduction for federal income taxes paid. MO, MT, OR and UT allow a partial deduction.
Unless the legislatures of these states have taken action (it certainly has been discussed in many states), residents of these states could well “have the refund taxed.”
<<<Quote by RealityChuck “The money has already been taxed, so it can’t be taxed again.”>>>
Wrong! The Feds taxed our state tax rebates last year and are planning on doing it again with this year’s state tax rebate. If a state wants to tax it they can, but I think most won’t because they don’t want to be seen acting as bad as the federal government.
Well before Bush signed the new tax law, Tax Notes Today was including 2 to 3 articles a day about whether state X would tax the rebate/refund/credit. I read few of them, because the state I live in doesn’t have an income tax, so the question doesn’t affect me personally.
However, from those I did read I picked up the following pattern. First stage: reporter notes that the refunds could be taxable. Second stage: state taxing authority spokesperson confirms that the refunds will be taxable. Third stage: state politicians trip over each other to amend the state tax code to render the refunds non-taxable.
Alabama is one of the two states planning to tax the federal tax rebate. Not too surprising, really, since Alabama is where I saw what I still consider to be the “best” sign I ever saw. It was in a restaurant, was posted near the iced tea machine, and read “Refil’s is free”. It’s tough to make three mistakes in a three-word sentence, but the fine folk of Alabama were up to it.