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We’re running TurboTax and TaxAct in parallel this year and came across a difference in how they handle state tax refunds.

As nearly as I can express it, if you itemize deductions and made estimated tax payments for 2007 and made a payment for 2007 in January 2008 and got a state tax refund in tax year 2008 for 2007, then you must reduce the refund by the fraction of your 2007 estimated tax paid in January 2008.

The question I submitted to TaxAct was:

According to IRS Pub 525 (2008), state tax refunds must be apportioned according to the estimated tax amounts paid in each quarter for users making itemized deductions. The Pub 525 “Example” in the middle of the second column on page 22 explains our situation.

TaxAct accepts the total refund amount as an input from our 1099G and accepts the 2008 estimated tax payments, but does not (seem to) have any mechanism for allocating the refund based on 2007 (not 2008!) estimated payments.

There is no provision on the “State and Local Tax Refund” worksheet for this calculation.

We are using TurboTax to cross-check our work. It prompts for the actual 1099G amount and the 2007 estimated payments, then calculates the correct amount on a separate “Sched A Line 5 Worksheet” and feeds the result into Form 1040 Line 10.
However, TurboTax has imported our 2007 return, so it (presumably) knows about the dates for those estimated tax payments. TaxAct does not and we have not found a place to enter those dates and amounts.

We think the workaround is to input a bogus 1099G amount by subtracting the unrecoverable part of the refund ($100 in the IRS example) from the actual 1099G amount ($400 in the IRS example), then also subtracting that amount from the “Prior year state and local estimates” line in the Sched A Line 5 calculations.

Does TaxAct handle this situation in a manner we have not discovered?

If not, is our workaround the correct way to handle this situation?

We were unable to find any TaxAct documentation explaining this situation, but perhaps we were not looking in the right place. Is it documented anywhere, other than in Pub 525?

Thanks …

Which generated this reply:

Dear TaxACT(R) Customer:

The TaxACT program does not make these calculations.  The work around that you suggested is the easiest solution to this problem.  If you make this adjustment to the 1099-G, you may want to attach a note to the return showing what you did.  To do this:

Preparer Notes can be used by the paid preparer, electronic return originator or taxpayer to provide additional, voluntary information related to the tax return but NOT required to be attached to it.

To access these screens in the Online return:
1. Click on the Federal Q&A tab
2. Click on Miscellaneous Topics and then Click on Review Topic on the Quick Q&A Topics screen (you will only see the Quick Q&A Topics screen if you have been through the Federal interview questions once already)
3. Click on Additional Information for Electronic Filing (the last one in the list) and then Click on Continue
4. Click on the electronic filing information option for your situation and then Click Continue

This will electronically file with the Federal return, however, will not be transmitted to the state.

So, basically, unless you happen to be intimately familiar with this bit of tax arcana or you’re using TurboTax, you’ll get sucker punched. As nearly as we can tell, it doesn’t make much difference to the bottom line, but you don’t want to find that out the hard way.