Originally posted by: alkemyst
Originally posted by: FP
Originally posted by: alkemyst
Originally posted by: FP
Simple question...
You are allowed to deduct state income tax from your federal return right?
If so, do you deduct the amount you paid in state taxes or the actual amount you owe?
For example, I paid $10,000 in state income taxes but only ended up owing $7,000.
Is my federal deduction $10,000 or $7,000?
$7000. Technically you haven't paid taxes until you file, it's just withholding.
Hmm... It appears TurboTax thinks otherwise. For some reason it is calculating my 2007 state refund as income in 2008 since it was paid to me in 2008.
In fact, when I look at my previous TT 1040 forms they do indeed use the "paid" amount in my Schedule A and not the "amount owed" amount.
you didn't say you had a refund in 2008.
This is why we avoid state tax questions though.
This seems like a confusing topic, so let me try to clear the air. There's no double-taxing going on here, don't worry.
Let's say your 2008 W2 reports a 10,000 withholding for state taxes. That means 10,000 was taken out of your paychecks throughout the year.
When preparing your 2008 federal taxes, you don't know yet what your actual state taxes will be (and if you'll get a refund at all), because you haven't prepared your state return yet. You need to prepare your federal first, before you prepare your state. So when you prepare your federal, you itemize your state taxes as 10,000.
Let's say that after you prepare your federal taxes and begin preparing your state return, you find out that you should only owe your state 7000, so you'll get a 3000 return for state. It's too late to update your federal and change the 10000 to 7000, because your state return was probably based off of your federal. Get it? So next year, you'll have to report that 3000 as income since you itemized 10000 in the first place.
It's a way of correcting it a year late, and sort of addresses the circular dependency problem.