Members of the Maryland Association of Certified Public Accountants are answering readers' tax questions through April 15.
In 1997, my employer withheld $4,000 state income taxes. My 1997 state income tax liability was $3,000. I itemized my federal tax deductions for 1997 and I used $3,000 as my state income tax. I received a refund of $1,000 from the state in 1998. My tax adviser claims that I must show the $1,000 refund as 1998 income and pay federal taxes on it. I disagree. Can you explain?
Technically, the $1,000 refund is income in 1998 under the Tax Benefit Rule. You should claim the income, but amend your 1997 return to reflect the $4,000 of state taxes paid. The IRS will even pay you interest on your refund. In either case, this does not affect your state return.
James Wilhelm, CPA, Koehler, Sparks & Hammond
The above advice is for general purposes only and is not intended as legal, accounting or tax advice. Specific situations may vary.
To ask a tax question, call Sundial, The Sun's telephone information service, at 410-783-1800. Call 410-268-7736 in Anne Arundel County, 410-836-5028 in Harford County, 410-848-0338 in Carroll County. Using a Touch-Tone phone, punch in the four-digit code 6225 after the greeting. To submit questions by e-mail and access an online tax guide, go to The Sun's Web site at www.sunspot.net/tax.
Selected questions will be answered in the Business section. No questions will be answered personally.
Pub Date: 4/01/99