Last year I found a large accounting error I made several years ago in computing the basis of a mutual fund I sold in 2009. What I had thought was a capital loss turned into a large capital gain and corresponding tax liability. As a result, I amended my 2009 taxes and made substantial tax payments to both the IRS and the State of California.
Question: Do the tax payments I made in 2011 for my 2009 taxes affect my
2011 federal and state tax returns?
Any state/local tax but not penalties you paid in 2011 is deductible on your 2011 federal tax return. Even if it is for any past year or a future year. I think even interest is deductible, but not sure. Payments to the IRS don't matter -- they are not deductible on your federal or CA state return.
Of course, if you're in AMT then the state tax deduction is not allowed partially or in full anyway -- so any extra state tax you pay makes no difference. Also, the itemized deduction is subject to phase out to 20% of it's maximum value if your AGI is high enough.
The only impact to your 2011 tax returns is the tax deduction on Form
1040 Schedule A for the "income taxes" you paid to CA in 2011. This would include any prior year "income taxes" actually paid in 2011.
Not for 2010 or 2011
Don EA in Upstate NY
The interest on the state income tax is not deductible as it is personal interest. TR 1.163-9(b)(2)(A). There have been several Tax Court cases that have tried to invalidate the regulation since 1987, returning the status back to the "origin of the tax" (i.e. tax on business transactions have business character per prior case law from the 1950s), but none have been successful.
The high-income reduction in total itemized deductions expired at the end of 2010.
Phil Marti VITA/TCE Volunteer Clarksburg, MD
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