State Income Tax Refund on Obama's 2008 Tax Return

Since the situation did not arise, this is merely a hypotheical question for your favorite tax topic, right?

While I can't answer this particular question, I can say that the Thompson-Reuters (formerly Creative Solutions) UltraTax does seem to do a pretty good job of pointing out there was AMT last year and the taxable line 10 amount was based on that, and it issues an FYI diagnostic advising we manually recheck their calculations, which they indicate in a worksheet.

If this didn't proforma from last year, their worksheet lets you tell it some important figures so it can run its own calculation for taxable line 10 amounts.

It would not surprise me to learn their software does a better job of calculating line 10 taxability than the IRS does.

UltraTax does follow the "traditional" interactions of line 10 with social security taxability that I understand you disagree with, but having heard from you many times on the issue, will not get further into it.

Art:

I did not follow your response.

Allow me to clarify my post.

President Obama's 2008 Federal Income Tax Return showed a $7991 state income tax refund on Line 10 of Form 1040 that was taxable because he paid the regular tax in 2008. (The refund was from a year that he paid the regular tax.)

What would have happened with that $7991 if he had been required to pay the AMT in 2008?

Would the $7991 been included in AMTI for 2008 per the Internal Revenue Code or would it have been excluded per the bollixed IRS instructions on Line

8 of Form 6251. The instruction does not conform to section 56(b)(1) (D) of the IRC.

I do my own "tax benefit" calculations, determining how much of the state tax refund provided a tax bnefit even though there was AMT.

I use a simple minded method: Do a what-if with and without that amount of state tax deduction, and if no difference, no tax benefit. Sometimes there is a partial benefit and then trial and error withWhat-ifs work fine, though Ultratax's worksheet (not the IRS worksheet); works for me.

~~~~

~~~~

I'm assuming you meant 2007 in the two places I noted.

The answer is he may not have to pay tax on part of all of the refund. Details have been debated here at length.

Steve

No, I accept that the $7991 state income tax refund reported on Line

10 of President Obama's 2008 federal income tax return was determined correctly and I assume that the refund was a result of a state income tax overpayment in 2007. It is clear that only the regular tax was paid by President Obama in both 2007 and 2008.

The President paid tax on the $7991 state income tax refund recieved in 2008 because he paid only the regular tax.

Now here is the issue.

If the President was required to pay the AMT in 2008 rather than the regular tax, would his accountant have followed the Internal Revenue Code or IRS instruction in determinining whether or not the $7991 refund was included in alternative minimum taxable income?

The instruction on Line 8 of Form 6251 calls for entering the amount on Line 10 of Form 1040 as a NEGATIVE number, thereby excluding the state income tax refund from alternative minimum taxable income.

Now here is what section 56(b)(1)(D) of the Internal Revenue Code provides,

(D) Treatment of certain recoveries No recovery of any tax to which subparagraph (A)(ii) applied shall be included in gross income for purposes of determining alternative minimum taxable income.

Here is what section 56(b)(1)(A)(ii) provides when a taxpayer pay the AMT,

b) Adjustments applicable to individuals

In determining the amount of the alternative minimum taxable income of any taxpayer (other than a corporation), the following treatment shall apply (in lieu of the treatment applicable for purposes of computing the regular tax):

(1) Limitation on deductions (A) In general No deduction shall be allowed -

(ii) for any taxes described in paragraph (1), (2), or (3) of section 164(a). Clause (ii) shall not apply to any amount allowable in computing adjusted gross income.

Based on the Internal Revenue Code, when the AMT is paid, a state income tax is not deductible in determining AMTI under section 56(b)(1) (a)(ii), therefore a refund of a tax that was not allowed as a deduction in determining AMTI would not be included in AMTI under 56(b) (1)(D).

Now where is the justification in the Internal Revenue Code for IRS's instruction on line 8 of Form 6251 (2008) for excluding from AMTI the refund of a tax overpayment that provided a tax benefit in a year the regular tax was paid?

To close the circle, Section 56(b)(1)(D) is necessary because Section

164(a)(3) provides that a state income tax is deductible in determining regular taxable income and as a consequence a state income tax overpayment can provide a limited long-term capital gains tax rate based tax benefit when the AMT is paid because the calculation of the capital gains portion of the AMT involves regular taxable income excluding capital gains.

Cheers,

WDK

For moderator: Dick, how much slack are you going to give this individual?

Professor Brown:

What facts in my posts in this thread do you find objectionable?

Cheers,

WDK

I find your repeated beating of dead horses to be objectionable. I find what I see as your repeated interference in the orderly process of inquiry and responses on this and other tax discussion boards to be objectionable.

Why don't you visit the MSN.COM discussion board, Tax Corner?

Ifyou refrain from criticizing the people who run that board you canpretty much say or do anything you like there.