It has come to our attention that Intuit products such as Lacerte, ProSeries, and ProConnect Tax Online, as well as other software products, are prorating taxpayers’ 2019 state tax refunds worksheet based on the amount of state income tax versus property and other deductible taxes entered on the 2018 return. For example, if the taxpayer has $10,000 in property tax and $10,000 in state income tax, the software indicates that 50% of the 2019 refund will be taxable.
The Code, as reformed by the Tax Cuts and Jobs Act, doesn’t make clear whether a taxpayer can choose which taxes, or portions thereof among the various taxes paid, may be used to comprise the $10,000 maximum deduction. It appears that these software companies are making their own assumption that taxpayers cannot choose, and that the taxes must be allocated proportionately.
One possible way to avoid this is to elect to deduct sales tax rather than state income tax, especially where the taxpayer pays more than $10,000 in property taxes and expects a state refund. However, keep in mind that taxpayers who are subject to NIIT would then lose any deduction for state income tax against their net investment income.
We are investigating this issue and more in-depth information will be covered in Spidell’s Federal Taxletter.