2018 state refund with no benefit

Client's property taxes exceeded 10k limit. The SALT deduction exceeded it as well. Looking back, I should have forced property taxes. We're in NY, so most homeowners exceed the cap with property taxes alone. NY State issued a 1099G for a portion of their 2018 state refund. Ultratax picks that same amount up as income. Revenue Ruling 2019-11 doesn't seem to address this, but I might be wrong. Can I handle it the same way as when the AMT gives no tax benefit to the SALT deduction, or should I go back and amend 2018 to take the sales tax deduction?

A refund or credit of prior-year state or local income taxes is taxable to the extent that the payment of that amount in the prior year reduced your client taxable income.

If it is a 2018 1099-G, the tax benefit should be measured by 2017 tax return. If your client did tax tax benefits on 2017 tax return for the state income tax paid, the 2018 1099-G state tax refund may be taxable.

If client received 2019 1099-G, since the property tax alone is way above the SALT limitation, there is no tax benefit in this case. Then, the 1099-G is not taxable.

Looking back, I should have forced property taxes

Not sure what you mean by that statement, but I use UltraTax and reviewed a few returns with similar situations.

In an identical situation where RE taxes and income taxes on the 2018 tax return were each over $10,000 UltraTax lists the refund on the 2019 Tax Refund Worksheet as "2018 st/loc refund with no tax benefit derived due to Sch A limit". It is not taxable.

In a similar situation but where RE taxes do not exceed $10,000 but income taxes make up the difference, UltraTax lists the refund on the 2019 Tax Refund Worksheet as taxable to the extent it was used to hit $10,000. Looking at this particular tax return, they had RE tax of $8,500, income tax deduction of $15,000, and a state tax refund of $3,500. Only $1,500 of the refund is taxable.

Now I see that if we would've elected to deduct sales tax instead, they still would've been at the $10,000 limit and would have no taxable refund in 2019. I guess we'll be looking at tax returns with these conditions to see if an amended 2018 return makes sense.

Sorry, meant "should have forced SALES taxes."

Still, I don't see how you are getting any taxable refund if the RE tax deduction was over $10,000 by itself. This did not happen in my client with the same situation.

Not sure either. 2018 Property taxes were $14,741. State income tax deduction was $10,788. I had to plug the state refund in the line "2018 st/loc refund with no tax benefit derived due to Sch A limit." Looks like Ultratax did it for you. I'll have to keep an eye out for it. Thanks for your help.

Now I see that if we would've elected to deduct sales tax instead, they still would've been at the $10,000 limit and would have no taxable refund in 2019

Thinking more about this, in prior years the taxable portion of a state refund was limited to the amount which exceeded the GST as if it had been claimed. So I think that the GST would not HAVE to be claimed on the 2018 tax return in my second scenario and UT is doing that calculation wrong.

I think there is another posting here where Ultra has admitted they are wrong...

So here is what I've found with UltraTax (I have not looked at another discussion yet if there is one).

In the 2018 software, the "Tax Refund Worksheet - No Tax Benefit Derived" worksheet appears to be calculating correctly the amount of 2018 state refund not taxable in 2019 due to AMT, zero tax, or the tax deduction limitation. However for some reason the amount of refund not taxable due to the tax limitation is not always getting proforma into the "2018 st/loc refund with no tax benefit derived due to Sch A limit" input field.

Not sure why this is happening but it definitely appears to just be an issue with UltraTax.

Thank you for the info.

Here is a previous discussion similar to this.

https://www.taxprotalk.com/forums/viewtopic.php?f=8&t=14109&p=127491&hilit=ultratax+refund#p127491

UltraTax is simply not handling this worksheet properly at all. I can't imagine how many taxpayers are overpaying taxes due to the fact that so many preparers out there just accept software calculations without verifying them...

Here it the link I posted:

viewtopic.php?f=10&t=16905

Need to go back and re-proforma the returns. 2018 worksheet 11 shows not taxable refund. Shows up in 2019 line 10 if pro-formad earlier in the year. Don't know the date they fixed it.

Very glad I caught it because that would just be one more error that could try and sneak by!

This is for Ultratax. Not sure about other programs.

I posted that in Business Operations because it had to do with a software problem. Maybe I should have posted it here?

I posted that in Business Operations because it had to do with a software problem. Maybe I should have posted it here?

I'm not sure...I previously posted a calculation error with UT in Business Operations as well.