Step-by-Step Guide
Step 1: Review Form 1099-G (Certain Government Payments)
Obtain Form 1099-G: Ensure the taxpayer has received Form 1099-G from their state tax authority, which details the amount of state income tax refunds or credits received for the previous year.
More about a 1099-G can be found here: https://www.irs.gov/forms-pubs/about-form-1099-g
Verify Refund Amount:
Check the refund amount listed on Form 1099-G.
Confirm that this amount matches the taxpayer's records of state income tax payments made in the prior year.
Step 2: Determine Whether the Refund is Taxable
Assess Itemized Deductions:
Determine if the taxpayer claimed state income taxes as an itemized deduction on their federal tax return in the previous year.
Use the IRS "State Tax Refund Worksheet":
Access the IRS worksheet to evaluate the taxability of the refund.
Consider factors such as the taxpayer's filing status and the total amount of state income taxes deducted in the prior year.
If the refund was not deducted, it is not taxable.
Step 3: Enter Refund Information in TaxWise
Navigate to the Income Section:
Log into TaxWise Online and go to the Income section of the tax return. This section will usually appear once you enter a client's information into the Main Info page.
Locate the State Income Tax Refund Section:
Find the specific area for entering state income tax refunds.
Input the Refund Amount:
If the refund is determined to be taxable, enter the amount from Form 1099-G:
For Schedule A: Input the amount on Line 1 of Schedule A under "State and Local Taxes."
For Form 1040: If applicable, enter the amount under the Other Income section on Form 1040.
If the refund is not taxable, do not enter it in the taxable income section.
Step 4: Apply Taxable Refunds to Form 1040
Include in Total Income:
If the refund is taxable, ensure that it is included in the total income calculation on Form 1040.
Double-check that the total income reflects the state income tax refund accurately.
Step 5: Review and Submit
Final Review:
Carefully review the entry for the state income tax refund to ensure it has been reported correctly.
Confirm that the taxability of the refund was determined accurately using the IRS worksheet.
Submit the Return:
Once all entries are verified and correct, submit the tax return through TaxWise Online.
Conclusion
By following these detailed steps, you can ensure that state income tax refunds are reported accurately, complying with IRS guidelines for itemized deductions. This process helps in maintaining precise income reporting and avoids potential issues with tax filings. If you have any questions or need further assistance, feel free to reach out!