Paying tax on income tax refund - what?!

[knowerofnada]

For itemized federal taxes: could somebody please explain the reasoning behing the IRS making us pay taxes on the income tax refund from the previous year?? I am at a loss as to how this makes sense whatsoever.

So if we have less taxes taken out in order to get a bigger refund, we are penalized by having to pay taxes on our refund the next year? When that tax refund money is simply because we overpayed in taxes? That makes NO sense to me and I would just like to understand the IRS reasoning on this one, because as it stands, it makes me furious.

[DreamsInDigital]

I've never had to pay taxes on a prior year's refund.

[knowerofnada]

You do if you itemize. This is our first year itemizing.

[Herausgeber]

No, you don't pay taxes on your federal refund. If you itemized last year AND this year, you would pay it on a state refund this year, but that's because you had taken a deduction for the amount in state taxes you paid last year (before accounting for the refund).

Does that make sense?

Are you doing your taxes yourself or using a preparer?

[srain]

Originally Posted by Herausgeber

No, you don't pay taxes on your federal refund. If you itemized last year AND this year, you would pay it on a state refund this year, but that's because you had taken a deduction for the amount in state taxes you paid last year (before accounting for the refund).

Yes that- when you itemize, you declare the amount taken out in payroll taxes, which doesn't account for your future refund. So the "paying taxes on your refund" now is really making up for the fact that if you itemized last year, you got to deduct more than you actually paid in the end.

[knowerofnada]

Oops -- yeah, state refund, sorry. No, it does't make sense, but i've got pregnancy brain and i'm sick so i'm not processing it well. I will have Dh read this and explain to me later. He'll definitely get it. I really appreciate the responses & just glad to know we're not getting screwed.

ETA we do Turbo Tax

[knowerofnada]

Ack, but I do know that we didn't itemize last year, and it's still saying we have to pay on our state refund from last year. What's up with that?

[knowerofnada]

update: it is not taking it out this year (since we didn't itemize last year), but the way Turbo Tax is set up, it just shows up on the Turbo tax form as you're doing it (last year's refund) but doesn't actually take it out at the end.

We still don't understand the explanation, but we hopefully we will...