State Income Tax Refunds – AMT Adjustment
The AMT adjustment for State Income Tax Refunds, line 8 on Form 6251, is a reduction to your different Minimum Taxable income. There isn’t much a taxpayer can do about this other than to understand just a little bit of what is going on.
Just for fun, let’s start with the IRS’ explanation for this in the instructions to Form 6251:
“Include any refund from Form 1040 line 10, that is attributable to state or local income taxes. Also include any refunds received in 2009 and included in income on Form 1040, line 21, that are attributable to state or local personal character taxes or general sales taxes, foreign income taxes, or state, local, or foreign real character taxes. go into the total as a negative amount. If you include an amount from Form 1040, line 21, you must go into a description and the amount next to the entry space for line 8. For example, if you include a refund of real character taxes, go into “real character” and the amount next to the entry space.”
What does this average in “plain English?” The answer is best done with an example:
Assume a associate paid $5,000 in state income taxes in 2008 and itemized this deduction (Schedule A), which they were allowed to do. But the state income tax return filed showed they had overpaid by $500. This $500 refund was received from the state in April, 2009.
For Regular Tax purposes, the $500 is reported as income in 2009. This is because of the tax rule that if an allowable deduction for some expense is taken in one year (e.g., 2008), but that expense is refunded in the following year, instead of amending the 2008 return to “correct” the deduction, the proper tax fix is to reverse the deduction in 2009 by reporting it as income. observe in total it truly was only a $4,500 expense, which is the deduction of $5,000 less the refund of $500.
For AMT purposes, both income (the refund) and deductions need to be shown on an apples-to-apples basis. Because there is no deduction of the $5,000 state taxes for those in the AMT, any related refund amount, Tax Refunds, line 8, does not require a recovery of that item in income like you see in the Regular Tax. The $500 is deducted from different Minimum Tax income in 2009, effectively netting any impact, income or deduction, to zero.