Question about reporting 1099-G state refunds in 2017 need advice

[hopetogetfi]

Hello,
My question is about my federal tax return 2017 that I tried to prepare today using an online tax service. I have two 1099-G forms marked 2017. Those are state refunds from the years 2014 (in the amount $2,540) and 2015 (in the amount $3,210). The online software does not allow me to enter those two amounts. They asked me which deductions I used in 2016. When I choose standard, I get a message that state refunds are not taxable. There is no way to enter those two state refunds. I contacted customer support and they said that I do not need to report those refunds in 2017 since I used standard deductions on my 2016 tax return. It sounds great, but I have a feeling that it is too good to be true. I do not want any problems with the IRS later. I decided to ask on this forum just to make sure before I send out the forms. I expect a refund. I always overpay, and then get a refund.
Please advise. Was the customer support person correct, or should I investigate further? Any suggestions would be greatly appreciated.
Thank you very much!

[secondcor521]

They are approximately but not precisely correct.

See the tip in the 2017 instructions for Form 1040 line 10 on page 23 in the middle of the third column:

"None of your refund is taxable if, in the year you paid the tax, you either (a) didn't itemize deductions, or (b) elected to deduct state and local general sales taxes instead of state and local income taxes."

- https://www.irs.gov/pub/irs-prior/i1040gi--2017.pdf

So these refunds would not be taxable if you did not itemize deductions on your 2014 and 2015 tax returns.

If you itemized for either 2014 or 2015 or both, then you would need to see the Form 1040 instructions for line 10 (on pages 23 and following at the link above) for what to enter on your 2017 tax return.

[hopetogetfi]

Thank you very for your response!
Unfortunately, I itemized deductions in both 2014 and 2015 even though my standard deduction was higher than itemized in 2015. I regret it now. Instructions for form 1040 for line 10 (pages 23 and 24) state that I need to see itemized deductions recoveries in Pub. 525. I printed a few pages from Pub. 525 and will try to read them tomorrow. It looks more complicated than I can handle myself. I sent an e-mail to customer support. I do not know if they can help me. I hope to see their response either tomorrow or on Monday. I am considering reporting this 1099-G income as 1099-INT since the software allows me to add more forms 1099-INT. I will probably overpay taxes (or get much smaller refund). At this point I just want this to be over.

Thank you very much.

[hopetogetfi]

Well I just tried to report 1099-G amounts as 1099-INT to see what happens. My federal refund got reduced by $1750 and my state refund got reduced by $540. I am going to sleep on this, do some reading this weekend, then maybe decide on Monday. 

[secondcor521]

Thank you very for your response!
Unfortunately, I itemized deductions in both 2014 and 2015 even though my standard deduction was higher than itemized in 2015. I regret it now. Instructions for form 1040 for line 10 (pages 23 and 24) state that I need to see itemized deductions recoveries in Pub. 525. I printed a few pages from Pub. 525 and will try to read them tomorrow. It looks more complicated than I can handle myself. I sent an e-mail to customer support. I do not know if they can help me. I hope to see their response either tomorrow or on Monday. I am considering reporting this 1099-G income as 1099-INT since the software allows me to add more forms 1099-INT. I will probably overpay taxes (or get much smaller refund). At this point I just want this to be over.

Thank you very much.

That would be incorrect.  It would be more correct to report it on line 10.  The software you're using should allow you to make an entry on line 10 by stating that you itemized in 2016 (which perhaps you didn't, but the tax software seems to be assuming that everyone gets refunds in a given year only from the previous year, which is the most common case but obviously not always true).

Normally most people just put the total amount of the 1099-G amount on line 10; in your case since you received refunds for two different tax years, you could just put the sum of those two refunds on line 10.  The IRS would certainly allow this and consider it correct.  Pub 525 and its complexities may enable you to put a lower number on line 10 and reduce your tax owed, but if you want to ignore those complexities entering the total amount would be perfectly legal.

[hopetogetfi]

I am writing to thank you sincerely for your advice, secondcor521. I was able to enter both 1099-G amounts together on line 10. I will be sending my 2017 return next week, finally. Thanks again!

[secondcor521]

You're welcome!  Glad things worked out.  :)