10997: 1040 - Federal Taxation of State Refund and Prior-year AMT

The software is able to perform the calculation needed in order to re-compute regular tax and Alternative Minimum Tax (AMT) on a return to arrive at the correct amount of taxable state refund to carry to next year’s return. 

State income tax refunds generally must be included in income if the tax was deducted in a prior year. There are times however, if there was AMT calculated on the return, there was no tax benefit to the state income tax deduction. If a taxpayer is subject to AMT, has itemized deductions, state income tax deduction entered on Schedule A, and has a state refund in the current year, a Return Note is generated with the return.

Drake Tax performs an iterative or “circular” calculation to arrive at the correct number and carry the proper amount forward to next year.

To perform the calculation open the MISC screen available from the Miscellaneous tab of the Data Entry Menu in Drake Tax, and mark the Tax return complete; compute the taxable state refund check box. This calculation may take up to a minute. (The program calculates the return on average, 15 times during this process.)

Wait until the return is complete before marking the Tax return complete; compute the taxable state refund check box and calculating the return.

The results of these calculations appear on Wks Refunds - Projected State and Local Income Tax Refund Worksheet. Line 1 of that worksheet has been divided into lines 1a, 1b, and 1c in order to show you the calculated amounts.