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DC tax question

Technical topics regarding tax preparation.
#1
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I have a client who has taxable disability income. In 2019 she was overpaid by about $26,000 and had to repay the excess in 2020. On her 2020 return I am entering a credit for the excess federal taxes she paid in 2019 (under IRC 1341), but I can't figure out how to address this on her state return (Washington, D.C.). Anyone know how D.C. handles this?
 

#2
Nilodop  
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I have never dealt with DC income tax, so ascribe whatever low (zero) value you choose to this answer. I saw nothing in DC law or elsewhere specific to this question.

1341 gives a credit or a deduction for restoring an amount previously included as a claim of right. You (properly, I assume) took a credit. Absent a specific DC credit provision, I think there are a few possibilities.

One might be that DC says too bad, just one of those things. That'd be inequitable.

Another might be that you amend 2019, but DC might disallow that, too, even though that would also be inequitable.

Another, which I think I'd try, is this. Include it on Calculation B of Schedule I of Form DC 40. That would reduce DC AGI and taxable income at the applicable rate for 2020, which I guess might differ either way from the rate in 2019. This approach however gets a bit controversial. You'd be reducing AGI, as opposed to increasing itemized deductions. I think that, for Fed purposes, that would be correct, but I'm not sure. See IRM 21.6.6.4.12.1 and .2. You'd get into whether they itemized in 2020 for Fed and if not can they for DC? And the question of the temporay law that disallows misc itemized deductions, which should be looked at. I think 1341 is not a misc itemized deduction for that law's purposes (see sec 67(b)(9)).

Let's pause for now. What's your reaction?
 

#3
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Thanks so much for the reply. Absent a specific provision in DC law, it seems to me that amending the 2019 return would provide the most accurate correction.

As you point out, entering the repayment as a subtraction to DC AGI could get a little messy. On the federal return, the deduction would have to be taken on Schedule A. The taxpayer did not itemize deductions in 2019 and most likely will not for 2020 and DC law says that they would also have to take the standard deduction on the state return. So I guess a subtraction from AGI would be the only way to do it. But that method is also less than ideal because the deduction would reduce DC taxable income to zero and they would only get back part of what they paid on the income in 2019.

I'll try calling DC and see if I can find anyone knowledgeable enough to help. In the meantime, if there is anyone on here who has dealt this situation before, I'd love to hear how you handled it. Thanks, Nilodop, for helping me think this through!
 

#4
Nilodop  
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On the federal return, the deduction would have to be taken on Schedule A.. Are you sure of that? IRM is unclear to me and I have not researched it.:
If the tax under Method 1 is less, the repayment is deducted, in general, on the same form or schedule on which it was previously included. Refer to IRM 21.6.6.4.12.1, Claim of Right- IRC Section 1341, Repayment of $3,000 or Less.
.
If it was reported as wages, taxable unemployment compensation, or other non-business ordinary income, it is deducted on Schedule A, Itemized Deductions.
 

#5
Nilodop  
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RR 57-603 was about withholding, so this excerpt is mere dictum, but for what it's worth,
... by reason of the fact that an employee is required to refund to his employer a portion of the wages paid to him during the preceding year by such employer and is entitled to a deduction therefor from his gross income in the year of the refund.


... it seems to me that amending the 2019 return would provide the most accurate correction. . Unfortunately, the Supremes, in the Lewis case, https://supreme.justia.com/cases/federal/us/340/590/, ended the idea of amending the earlier year.
 

#6
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Darn those Supremes. Thanks for that. It surprises me that there isn't clearer guidance on this issue. This can't be that unusual a situation.
 

#7
Nilodop  
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Two points. The Lewis case is Federal. In your case, you'd be looking for a state deduction, so maybe that's a distinction. Plus, if you were able to take it as an itemized deduction, it would not be subject to either the 2% floor or the temporary disallowance of misc itemized deductions.

I'm curious, when you did the 1341 calculation to decide whether a deduction or credit gave you the best answer, how did you treat the deduction, above or below AGI?
 

#8
Nilodop  
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Here's how NJ does it. Pretty reasonable. https://www.state.nj.us/treasury/taxati ... s/tam7.pdf
 


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