QUESTION DETAIL
Related User
Votes
In late 2008, my employer mistakenly changed my state of residence from Kentucky to West Virginia. I live in Kentucky, but work in West Virginia. Thus, state income taxes were withheld by West Virginia for the years 2009 through part of 2013. Unfortunately, Kentucky didn't realize that a reciprocal state had been withholding (while Kentucky had been crediting me as if it were withheld by Kentucky) until August 2013, nor was I aware of it until August 2013 either. As directed by Kentucky, I filed non-resident forms for years 2009-2013 to recover the tax from West Virginia and then forwarded it to Kentucky. I filed for exemption from interest and penalties assessed by KY since the error had been my employer's, and the exemption was granted for each year. I have received a 1099-G for each year from WV and am instructed to include it as state tax refunds on my 2013 federal income tax. I would assume that to offset that, I will enter the amount paid to KY in my itemized deductions under state income tax paid in 2013. However, because my deductions are limited due to my income, the amount I enter as an income tax refund won't be offset dollar for dollar by what I enter on the itemized deductions. How do I get around this inequity?
ANSWER
The BIDaWIZ Team's Answer:
While you received a 1099-G in 2013 for the prior year state tax payments to WV, not all of it may be reported as taxable income. This may solve your problem as referenced in IRS Publication 525. Specifically, if you could choose to deduct for a tax year either state taxes or state sales taxes, then the maximum refund that you may have to include in income is limited to the excess of the tax you chose to deduct for that year over the tax you did not choose to deduct for that year. For instance, if in 2012 you paid $11,000 in state income tax and $10,000 in sales tax, and choose to deduct the state income tax, the amount of your state income tax refund maybe reduced. Let's say in 2013, you received a $2,500 state income tax refund, the maximum refund that you may have to include in income is $1,000, since you could have deducted $10,000 in general sales tax.
