Income Tax Refund Taxed as Income?

[Jacob]

So, somewhere else on the internet, I came across the statement that in some places in the US - in particular in Maryland - if you get an income tax refund, it is considered income and taxed as such.

That sounds outlandish to me, so naturally I come to to languish.

Is that for real?  Does it happen in places other than Maryland?  Is there something more too it, to make so you don't have to pay extra tax for letting the government have your money for a year?

[Admiral Yi]

Iowa does.  You get charged state income tax on the federal tax refund from the previous year.

[MadImmortalMan]

Iowa does.  You get charged state income tax on the federal tax refund from the previous year.

So, Iowa's deductions must be on the post-federal net pay, or else you are taxed twice on the same money, right?

[Admiral Yi]

So, Iowa's deductions must be on the post-federal net pay, or else you are taxed twice on the same money, right?

I don't *think* there's a deduction for federal taxes.

Just checked my return: it's net of *withholding.*  So no double taxation.

[Martinus]

Only in America. 

[MadImmortalMan]

So, Iowa's deductions must be on the post-federal net pay, or else you are taxed twice on the same money, right?

I don't *think* there's a deduction for federal taxes.

Just checked my return: it's net of *withholding.*  So no double taxation.

I meant withholding, yes. Makes sense I suppose. Since a federal income tax refund is money that you earned as income but stupidly deferred having it paid to you instead of putting it in the bank, then it would have to be taxed by the state if the state has an income tax.


Edit: So I guess that answers Jake's question. The refund is a deferred income, but it's still income. If, however, the state withhold state taxes on the gross amount, then it would be wrong.

[Jacob]

Iowa does.  You get charged state income tax on the federal tax refund from the previous year.

So if the federal government takes too much of your money, you have to pay tax on it before you get it back?

That's... wow.  I'm generally happy to pay taxes, but that just strikes me as offensive.

So in general is this considered perfectly okay, or is this one of those many small things that people hate about the system/ gov't but don't really rail against because it's one of many minor stupidities?

[Jacob]

:hmm:I meant withholding, yes. Makes sense I suppose. Since a federal income tax refund is money that you earned as income but stupidly deferred having it paid to you instead of putting it in the bank, then it would have to be taxed by the state if the state has an income tax.

Oh... so what happens is this:

Normally, you pay federal tax on your income.  Separate from that, the State also has an income tax.  When the State calculates income tax, it's based on whatever portion is left over after federal tax - rather than say, being calculated as a percentage of of the federal tax.  So if you get a refund of federal tax money, that money was never counted as income when you earned it for State tax purposes?  And thus you pay State income tax on it?

If so, that does make sort of sense.

[ulmont]

Iowa does.  You get charged state income tax on the federal tax refund from the previous year.

Same in Georgia.  The theory being that you didn't get taxed on it last year, since the federal tax paid offsets your taxable income.

[Martinus]

It's an equivalent of getting robbed and then having to pay tax on the money the thief gives you back.

[ulmont]

It's an equivalent of getting robbed and then having to pay tax on the money the thief gives you back.

No, it's not.  It's the difference between the two sovereigns and their respective taxation schemes.  The state doesn't tax you on the money that you paid to the federal government, but does tax you on the money that you *didn't* pay to the federal government.

[Admiral Yi]

No, it's not.  It's the difference between the two sovereigns and their respective taxation schemes.  The state doesn't tax you on the money that you paid to the federal government, but does tax you on the money that you *didn't* pay to the federal government.

Yeah.  States could either tax gross income and set the tax rate lower or tax net income and set it higher.  If they tax net income then including the refund makes perfect sense.

[DGuller]

It's an equivalent of getting robbed and then having to pay tax on the money the thief gives you back.

Your analogy is like a rectum during constipation:  strained and full of shit.

[Neil]

It's an equivalent of getting robbed and then having to pay tax on the money the thief gives you back.

Martinus analogy alert!

[Zanza]

I wonder if all those people complaining about how complicated our taxes are in Germany know that you have to pay taxes on both state and federal level in the USA.