AMT and Taxable State/Local Refunds

Technical topics regarding tax preparation.
#1
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There should be an elementary question section, but I'm struggling on this and Kevin would kill me for relying on my tax software.

High net worth individual.

In 2012, TP is $20,000 deep into AMT. He has a 2012 State Refund of $80K and a $5K city refund.

None of his 2011 ($50k) state/local refunds were taxable in 2012.


In 2013, his AGI is high enough so that there is NO AMT, but my software is taxing the whole $85K ($80+$5) from 2012 as a taxable refund on page one.


If he received no benefit in 2012 (because of AMT), why would the entire $85k be taxable in 2013?
 

#2
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It wouldn't be. What makes you think your software understands the tax benefit rule as applied to prior year's AMT? Mine requires a manual override, as well as completing the worksheet in Pub. 525 by hand.
 

#3
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That's why I asked - I don't believe it knows - it reads "The program assumes that if there was ANY tax benefit received...the FULL amount of the refund is taxable' - I just noticed this language.
 

#4
DAJCPA  
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In 2012, TP is $20,000 deep into AMT. He has a 2012 State Refund of $80K and a $5K city refund.

If he was only "20,000 deep" (I interpret this to mean if you removed 20K of AMT preference & exclusion items he would no longer be in AMT) into AMT and his state & local tax refunds were this much, he probably received some, if not full benefit from the state & local tax deduction. There is a cut-off point at which the state tax deduction did reduce regular tax to the point of where AMT kicked in. There is tax benefit of state & local tax deduction up to this cutoff point. If your refunds were less than this, he received full benefit from the overpaid amounts and the refunds are fully taxable. You have to do the worksheets to see how much benefit was received.
 

#5
DavidG  
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MassTaxPro, that could be a lot of manual computations. What tax software do you use? Since I have a lot o AMT clients, I would not use software that did not perform the necessary calculations.
 

#6
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DAJCPA - thank you and I believe you are right. I also believe that my software does calculate the recomputed tax correctly. After this, I am coming up with an adjusted AMT amount of $0 - which means this is fully taxable and a benefit was received.
 

#7
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A simple solution is to create a 1040X for the previous year and remove the amount of the refunded tax from the Schedule A. If AMT still exists then none of the refunds are taxable. If there is no AMT then adjust the amount of income tax deducted until AMT and regular tax are identical. The amount of actual tax deducted in excess of the amount now on the Schedule A is the amount of refund that is NOT taxable. This will give you the exact amount.
 

#8
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Nice one Nightsnorkeler! I would like to believe that even Kevin would be proud.
 

#9
WEISSEA  
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Proseries has a State & Local Refund worksheet that it directs you to, if in the prior year the client was subject to AMT. It will tell you to go back 1 year and change the taxable income to $$, so you have to have prior years return to override. Sometimes it is necessary to do any iteration if not all the refund is excludable.
 

#10
makbo  
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The Proseries worksheet the WeissEA mentions works well, it does the iterations for you. UltraTax will print out a worksheet showing the calculation in the prior year when TP was subject to AMT, and proforma the result to current year. ProSeries could do the same thing, I think, except it does not assume how much state refund you received, you have to enter it.

Nightsnorkler describes the basic calculation process well, except I would replace "until AMT and regular tax are identical" with "until TMT (tentative minimum tax) and regular tax are identical".
 

#11
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Proseries also has a "what if " schedule. The calculation can be done by going into the prior year what if schedule and adjusting the deductions for the state & local tax deductions.
 

#12
cotopop  
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I have Drake software and unfortunately there software doesn't calculate properly when it comes to the condition of having a state tax refund and AMT in the same year.I have to manually override. Generally if you take the amount of AMT and divide by 26% or 28% (whatever AMT rate taxpayer is in ) the resulting answer tells you the maximum amount of tax refund you can offset .For my clients it seems to always work out they can offset the total refund.
 

#13
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In Proseries, I open the prior year and use Tax Planner, adjusting State & Local taxes. Works well most of the time.
 

#14
Wiles  
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Don't forget to also look for any changes to credits or carryforwards when you do the proforma 2012 tax return. The tax may not have changed, but they could have still received a benefit.
 


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