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The instructions for the Form 1040 State and Local Income Tax Refund Worksheet (Line 10) say that the worksheet cannot be used if (among many other things) the last payment of estimated state or local income tax was made in the following year.

I feel like I must be missing something, because I do not see anything in the more detailed instructions in Publication 525 that relates to this issue.

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In p525, see the section titled Recoveries, and in particular, the subsection titled “Recovery for 2 or more years”.

You take the percentage of the recovery allocated to a prior year (based on the percentage of state tax paid in the prior year) and treat it as income. The percentage of the recovery allocated to the current year is used to reduce your state tax deduction on schedule A for this year.

You are supposed to attach a statement to your return showing how you allocated the recovery to each tax year.

  • This is such a headache that it is the main reason that I always make sure to underpay my state taxes, so I never get a refund. And then Oregon goes and screws it up by issuing a “kicker” refund. – prl Mar 24 '18 at 2:28
  • My reactions: Thank you! OMG! Is there any way to make a negative estimated tax payment??? JK. – Alan Snyder Mar 26 '18 at 2:21
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I think this is just a poorly worded instruction. It almost certainly means that if an estimated tax payment was made in the following year, it can't be included in the worksheet. For example, if you made a 2018 estimated tax payment in 2017, you can include it, if you waited until after the first of the year, you can't.

This is why there was so much hoopla about making estimated payments for 2018 before the end of 2017 (after which many people will not deduct more than the new 24k standard deduction).

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    The second sentence is bass ackwards. An estimated tax payment for 2017 that is made in 2018 (typically the taxpayer has untll January 15 to make a timely payment of the 4th quarter estimated tax payment) cannot be counted as a tax payment made in 2017. The state income tax deduction for 2017 is based on tax actually paid in 2017 (4th quarter payment for 2016 made on or after 1/1/2017, any tax paid with 2016 state return, withholding in 2017, estimated tax payments for 2017 made in 2017, less taxable portion of state income tax refunds received in 2017. – Dilip Sarwate Mar 22 '18 at 22:51

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