State Taxes?

[HWNJAP]

Hey has anyone ever questioned "WHY" the stated taxes you twice on your income "TAX RETURN"?

Your tax return was already taxed the year before? Just because you were lending it to the state for "FREE" for that year. Why do you get taxed on it again this year??


Example:

Worker "A" make $50K in 2006 he pays $10K in state tax. (Not sure about the math)

Worker "B" also makes $50K in 2006 but he pays $15K in state tax.

Both people made exactly the same income.

Both are required to pay $10K in state tax.

Worker "B" receives a $5K tax return.

Move forward to 2007. Worker "A" & "B" both made $50K again through the year.

Worker "A" claims a $50K income for the year.

BUT!

Worker "B" has to claim that he earned $55K ($50K + his $5K tax return)

Why?:confused: When it was actually earned in 2006, and was already taxed?


Isn't worker "B" being hosed?

How can this practice be fair? Is it even legal?

[GeckoGeek]

If I remember correctly, B only has to declare the $5K return as income *IF* he declared the $15K tax withheld as a deduction. There's a whole worksheet that has to be filled out to deal with this.

If neither A nor B declared the state tax withheld as a deduction, then both have a 50K taxable income in 2007 - both are the same. And B doesn't declare the $5K refund as income - again both are the same in 2007.

If both declare the state tax withheld then A had $40K taxable income and B declared $35K taxable income - too low an amount after the refund. So now that last $5K of income is being added to 2007. The downside of that is that it could be taxed at a higher rate, so it's not a good idea to get a large tax refund.

[HWNJAP]

Hey thanks for the reply!
I'll have to look into that "state tax withheld" Deal?

But the area I was referring to is your Fed Returns. That's what I was told you would need to claim as Income on your state taxes this year. Although it was already taxed last year.

[tutusue]

Hey has anyone ever questioned "WHY" the stated taxes you twice on your income "TAX RETURN"?[...]
[...]But the area I was referring to is your Fed Returns.[...]
When I read your first post I thought you made a typo; "stated" instead of "state". There was no mention of a federal return so, needless to say, it would be difficult to receive accurate information even tho' GeckoGeek gave an informative reply. Just my 2¢! :rolleyes:

[GeckoGeek]

But the area I was referring to is your Fed Returns. That's what I was told you would need to claim as Income on your state taxes this year. Although it was already taxed last year.

From the Instructions for Form 1040 for 2007 (http://www.irs.gov/pub/irs-pdf/i1040.pdf):


Line 10
Taxable Refunds, Credits, or
Offsets of State and Local
Income Taxes

None of your refund is taxable
if, in the year you paid the tax,
you either (a) did not itemize
deductions, or (b) elected to de-
duct state and local general sales taxes in-
stead of state and local income taxes.

If you haven't deducted your state taxes from the Fed in the past, no worries.

[HWNJAP]

From the Instructions for Form 1040 for 2007 (http://www.irs.gov/pub/irs-pdf/i1040.pdf):



If you haven't deducted your state taxes from the Fed in the past, no worries.
Hey thanks for the information!


There's a lot to read there! I better look into it deeper.

all my Co-workers keep telling me that it is bad to get a big return?

But if it's not taxable then there should be no problem?

[GeckoGeek]

There's a lot to read there! I better look into it deeper.

If you're doing your own taxes, I sure hope so! I'm no professional, I know what I know from doing my own.


all my Co-workers keep telling me that it is bad to get a big return?

As with many things, it depends. That refund is and always has been your money. You've given the government an interest-free loan. If you're generally good with handling your money, it's better if the money stayed in your hands.

However, if you have no savings discipline, then that saved up refund could come in nice for big purchases. ;)