6

In 2015, the Supreme Court found a local taxation detail in Maryland unconstitutional as double taxation (Comptroller of the Treasury of Maryland v. Wynne). Residents who doubly paid could then fill out a form and send it to the Maryland Comptroller to request a refund accordingly.

The question is - is this refund taxable? I understand that typical state income tax refunds are taxable in the next year, but this seems to be a slightly different case: I paid exactly the tax that was then-understood to be correct. I recently got a 1099-G in the mail, so I have a feeling that it's taxable -- but the government's mistake should not be my tax penalty!

I couldn't find any articles specifically about this online.

5

Because the Wynne tax refunds cover several years the question of it being taxable income would depend on if you were itemizing during each of those years.

Imagine this scenario:

year Withheld    year filed   Wynne refunded   itemized
2012             2013         123.00            yes
2013             2014          42.00            no
2014             2015         777.00            yes

You received a total of $942.00 back from the State of Maryland because of Wynne in 2016.

Because you itemized in year 1 and year 3 those might be counted as income. The tax software should ask you if you itemized in each of those years. If you did, and the additional deductions exceed the standard deduction by enough, the returned money for that year is taxable income in 2016.

Added info to discuss itemizing vs standard deduction.

In year 1 a taxpayer itemizes. Their total deductions are $7,000 and the standard deduction is $6,000, so they pick the better deal and claim $7,000 in deductions. If they are in the 25% tax bracket that extra $1,000 in deductions saves them $250 in federal taxes. The state tax return they file shows they over paid the state by $100, and they get a refund from the state.

In year 2 they need to address the $100 from the state, and they get a 1099-G from the state. The federal tax form asks them to determine if the money is taxable. It is because if they could have gone back in time to the year before, the $100 refund would have brought the itemized deductions down to $6,900 and the tax savings from their deductions would have only been $225. So on the year 2 tax form they have to claim $100 as income.

Now imagine a different taxpayer in a slightly different situation.

- itemized deductions $5,500
- standard deduction $6,000
- So they pick the standard deduction of $6,000.
- state tax refund $100

so in year 2 they look back and see if they had used the time machine:

- itemized deductions $5,400
- standard deduction $6,000
- So they still would pick the standard deduction of $6,000.

so in year 2 the refund from year 1 isn't counted as income because in the IRS viewpoint the tax form wouldn't have changed.

  • Interesting. My years & amounts were similar to that, and I did not itemize any of those three years. So perhaps not taxable? What is the explanation behind this (std. vs. itemized making a difference here)? – Stershic Feb 2 '17 at 6:34
  • @Stershic If you claimed your state income tax as a deduction to your taxes, then you have to claim this refund as income. If you didn't claim your state income tax as a deduction to your taxes, then there's nothing to claim. – Joe Feb 2 '17 at 15:13
  • I see. So those refunds aren't directly calculated as income in year 2 -- they're calculated more as retrospective corrections to year 1. If, as a result of the correction/refund, I now owed more money in year 1, then it counts as year 2 income. – Stershic Feb 3 '17 at 5:46

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .