Overpayment applied to est tax taxed twice?

[ojjuan]

What is the name of your state (only U.S. law)? NY

I had a large overpayment of federal and state taxes in 2008 because of my estimated tax payments. The bulk of the overpayment was applied to my estimated taxes for 2009. I'm pretty sure these refunds are taxable for 2009 as I itemized my deductions in 2008.

Now all that is fine however, in 2009 my employment situation changed so I had significant witholdings on my W-2. As a result, I am due a refund without even accounting for the estimated taxes I paid, which were a result of applying the overpayment in 2008. I made no additional estimated tax payments. The estimated taxes I paid in 2009 are pretty much just being added to my refund. Now it seems to me that this refund will be taxed again as income for 2009 as I am itemizing this year so it feels a bit like my original overpayment is being double taxed.

Am I looking at this correctly? And if so, is there anything I can do to avoid this next year?

 

[FlyingRon]

You need to get yourself to a tax professional.

A refund is only taxed when it was included in a deduction taken for the taxes paid the previous year. You got the deduction for paying state tax, but if you in fact got some of it back, that difference needs to be taxed.

You are not being double taxed if things are done right. If you paid estimated tax and only deducted the exact tax due to the state, then the deductible overpayments aren't taxable. Your federal tax isn't deductible at all so neither are the refunds.

 

[LdiJ]

You need to get yourself to a tax professional.

A refund is only taxed when it was included in a deduction taken for the taxes paid the previous year. You got the deduction for paying state tax, but if you in fact got some of it back, that difference needs to be taxed.

You are not being double taxed if things are done right. If you paid estimated tax and only deducted the exact tax due to the state, then the deductible overpayments aren't taxable. Your federal tax isn't deductible at all so neither are the refunds.

I don't think that the OP is going to understand you Ron...

Your federal taxes were never deductible, so your federal refunds are never taxable.

Your state taxes paid (which includes withholding and estimated payments) were deductible, therefore any refund of those payments becomes taxable income. In other words, a person ends up deducting a tax that later gets refunded back to them.

However, as FlyingRon said, if you did your itemized deductions incorrectly, and only deducted the exact amount of state tax that you actually paid, then the refund would not be taxable income.

 

[tranquility]

Not only that, but there's a worksheet to see how much of the refund is taxable.

 

[ojjuan]

Thanks for the quick replies and I got it now.