I have been having some discussions with software vendors and other preparers about how the 1099-G amount is computed for New York State. This is going to be especially of concern now that New York no longer supplies these forms on paper.

I believe that New York State computes the 1099-G amount by taking the total 2009 NY deposits minus the NY income tax liability for 2009. In other words, for the 2009 Form IT-201, it would be the amounts on Line 72, 73, and 74 plus the total estimated payments made during 2009 (i.e., before 1/1/2010) minus the amount on line 46 minus the amount on line 58.

I have had sufficient discussions with New York State and compared enough New York State 1099-Gs to tax returns be fairly certain that while the nonrefundable credits ARE included in the 1099-G, the refundable credits ARE NOT. New York State does not deem these to be a recovery of a previously deductible amount since they can exceed what was deposited/deducted./paid by the taxpayer. The computation in the previous paragraph gives the “recovered” amount and then the refundable credits may be applied against any remaining liability or refunded. This apparently is not how the 1099-G is computed for all states and I am wondering if there is some deeper logic behind what they are doing.

I am beginning to think that any other New York State refundable credits might need to also be treated as "other income" on page 1 of the 1040. If you accept their reasoning that they do not include refundable credits as part of the 1099-G since they are not recoveries, what are they? It has occurred to me on various occasions that I have never seen anything in the code that generally allows all state and local payments to be considered nontaxable. If these amounts are not excluded from taxation, then I would think they should be considered some form of taxable income. Has anyone got a citation that allows these amounts to be treated as nontaxable income?

I am beginning to think that they are correct but that there is a much deeper implication here. What I think is happening here is this:

1. Any nonrefundable credits are used to determine tax liability. Any excess of payments over tax liability is potentially a recovery of a previously deductible amount. However, nonrefundable credits are payments to you from the state which would occur regardless of whether or not you paid in withholding or estimates and regardless of whether or not you itemized are not counted.
   
2. Instead, those nonrefundable credits are all considered taxable “other income” in the year received regardless of whether you used them to pay a balance due or it increased your refund.

Thus, if you paid in $2,500 and your tax liability is $1,500, your potential amount for the 1099-G is $1,000. Then if you have refundable New York State credits of $4,000, you would list $4,000 on page 1 of the following year's 1040 (as other income.

Similarly, if you paid in $1,500 and your tax liability was $2,500, you would have no 1099-G but would be entitled to a new deduction of the $1,000 additional tax you paid next year. However, if you have refundable New York State credits of $4,000, you would still list the $4,000 on page 1 of the following year's 1040 even though your actual refund check was only $3,000. The $1,000 difference would be a payment to New York State (paid partially with your $4,000 refundable credit) in the following year.

This is very disconcerting, but it is the only explanation I have for why New York computes their 1099-Gs differently from other states. In the example above where you paid in $1,500 and have a tax liability of $2,500 but get an EIC that ends up giving you a refund, New York does not issue a 1099-G (even if you do itemize). You owed and paid tax of $1000 from the EIC.

I am beginning to believe that New York may be the only state (or one of very few) which is computing the 1099-G correctly. Then this goes back to the question I have asked you several times before which is "Under what code section would a refundable credit from a state be considered nontaxable income?" I have seen that federal refundable credits are not part of taxable income, but I have seen no such reference to payments from any state.

If a taxpayer had no tax deposits but gets back $1,000 each from the state EIC, obviously, it is not a recovery of a previously deducted amount since they never deducted anything. Can anyone cite anything that entitles them to a $1,000 tax free payment in that scenario?

An associate who I asked about why refundable New York State Tax Credits are not considered taxable income decided to seek advice from others and then decided to ignore my question and just email me that I am wrong in my analysis that the 1099-G amount. They explained to me that it has nothing to do with the liability or the deposits but is simply:

Quote:

the state refund minus the refundable credits

Gee, thanks for your show of support!

I ask a serious question about why a New York State refundable credit is not considered taxable income to the recipient and you think I need to be first be taught the basics how to compute what is going to be on 1099-G amount despite the detailed explanation I gave and my mentioning that I had confirmed my computations with New York State.

This response is so incomplete that it highlights why I never start with the refund on the return and instead work with the deposits and the liability. I have never seen any 1099-G (from New York or any other state) that did not consider offsets to the refund which were used to support charitable causes on the return to also be part of the refund amount on the 1099-G. That is considered in my computation but totally ignored by the people who feel the need to correct me. Payments to cover Sales Tax paid to New York with the return are also part of the refund. However, the two experts who feel that I do not know how to compute the 1099-G amount don't think those count either.

The two experts also seem to think that a refund coming partially from the estimate paid in January is also included on the 1099-G. I don't see how. It would be illegal to deduct a January payment in the prior year, so how could this be the recovery of a previously deducted amount? My discussions with New York State have confirmed that they do not include it. I have never seen them include the January paid estimate on the 1099-G, but have seen situations where a client mailed a payment in December and the state did not consider it paid until January and erroneously left it out.

The point of the question was not, "I am stupid and I don't know how to compute what the New York State 1099-G amount should be," but "I need help in understanding under what federal statute New York State Refundable Credits are not considered taxable income to the recipient." Of course, in their response, the two experts did not wish to comment on that. I am not saying that they did not have an answer, just that they must have felt that anyone who cannot even compute the 1099-G amount correctly probably would not understand it (or does not deserve to know it).

I do not understand why they felt the need to correct me, but I will state here that by evaluating the liability and deposits, you accomplish three things:

• You realize that estimates paid in January are not part of the refund.
  
• You don't have to remember all the lines of sales tax and charitable payments and refundable credits
  
• You will realize that even if the taxpayer has a balance due (due to the sales tax payments and various contributions), there could still be a 1099-G amount

At least I learned one thing. I now know who not to ask about this.

Let's please get back to the original question. I know that these refundable credits are not part of the recovery of income tax paid (especially when they exceed the income tax paid) and I know that they are not included in the 1099-G amount.

Can anyone cite a reference as to why they might not be considered other taxable income?

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Doug