WI taxable refund phenomenon

If it doesn't fit anywhere else, it fits here
fennel
Forum God/Goddess
Posts: 4728
Joined: Thu Sep 28, 2006 4:24 pm
Location: Inside the Green Zone, Madison

WI taxable refund phenomenon

Postby fennel » Sun Feb 16, 2014 7:02 pm

I'm curious to know whether anyone knows the purported reasoning or background behind the fact that WI state tax refunds are subject to tax as income. (Plus sales tax — WTF?)

To me, it's akin to tendering a $10 bill for a $2.50 coffee, and then having the change returned designated as a supplement to my yearly income, plus some portion of that for "sales tax."

So you're taxed on the income, then you're taxed again on what you overpaid (by mandated automatic withdrawal).

What is this voodoo? Can anyone enlighten me?

jman111
Forum God/Goddess
Posts: 4548
Joined: Wed Aug 12, 2009 12:43 pm
Location: Dane County
Contact:

Re: WI taxable refund phenomenon

Postby jman111 » Sun Feb 16, 2014 7:35 pm

I'm pretty sure that it's because you have deducted your previous year's state tax. (If you take the standard deduction, you don't get taxed on your state refund.)
That deduction is based on the previous year's state tax withholding, not actual state tax paid. When you get a refund, you then must be taxed on the overestimated deduction (the difference between withholding amount and actual state tax paid).

Steve Vokers
Forum God/Goddess
Posts: 1202
Joined: Tue Oct 07, 2003 11:58 am

Re: WI taxable refund phenomenon

Postby Steve Vokers » Mon Feb 17, 2014 5:24 am

That is correct. When you filled out your federal form for 2012, you put down the amount of state taxes withheld as shown on your W-2. If you get a refund, that means the actual tax you paid was less than the amount withheld.

Since you can only deduct the amount of state taxes actually paid, you have to add back the amount of your refund the following year.

fennel
Forum God/Goddess
Posts: 4728
Joined: Thu Sep 28, 2006 4:24 pm
Location: Inside the Green Zone, Madison

Re: WI taxable refund phenomenon

Postby fennel » Mon Feb 17, 2014 9:35 am

So this is to say there's a deduction (a credit to the taxpayer based on the liable portion of the amount witheld) that's entirely separate from the tax — which is based on the actual earnings?

HawkHead
Forum God/Goddess
Posts: 1892
Joined: Tue Jun 05, 2012 1:29 pm

Re: WI taxable refund phenomenon

Postby HawkHead » Mon Feb 17, 2014 9:49 am

State taxes paid are deductible on your Schedule A or itemized deductions. Since individual tax payers file on the cash basis method we get to deduct state income taxes as paid. Since the amount you pay during any year does not equal your actual WI tax due on your tax return that amount has to be accounted for in the following year.

If you receive a refund that amount is added to federal income only. If you have to pay taxes in to the state you get to deduct that amount on your next federal return.

If you do not itemize on your personal tax return and use the standard deduction no amount of the refund is taxable because you received no deduction for the amount on your federal tax return.

Henry Vilas
Forum God/Goddess
Posts: 24678
Joined: Wed Sep 04, 2002 8:57 pm
Location: Name sez it all
Contact:

Re: WI taxable refund phenomenon

Postby Henry Vilas » Mon Feb 17, 2014 9:54 am

It sound like you bought a house and could finally itemize for the first time last year.

That, or you gave a shit load to charity.


Return to “Catch All”

Who is online

Users browsing this forum: No registered users and 1 guest