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Taxes on Tax Refunds

Hypancistrus

Hypancistrus

New member
I just opened a piece of mail in which the state comptrolled informed me that I received an income tax refund in 2010. Apparently I have to pay taxes on the refund as income.

I'm trying to wrap my head around this.

The refund is money that the state took from me as taxes that wasn't justified. If I opted to withhold more money from my paycheck, they would never get that money, and theoretically the amount of taxes that I pay would be reduced, not increased.

So it seems kind of weird that they tax me on money they owed me in the first place.

Am I thinking about this wrong? I admit I am not all that fluent in money matters.
 
I have no idea. I know I've seen these things in the past and taken them with me when my tax guy does my taxes, but I never really thought about the concept before.
 
Hypancistrus said:
I just opened a piece of mail in which the state comptrolled informed me that I received an income tax refund in 2010. Apparently I have to pay taxes on the refund as income.

I'm trying to wrap my head around this.

The refund is money that the state took from me as taxes that wasn't justified. If I opted to withhold more money from my paycheck, they would never get that money, and theoretically the amount of taxes that I pay would be reduced, not increased.

So it seems kind of weird that they tax me on money they owed me in the first place.

Am I thinking about this wrong? I admit I am not all that fluent in money matters.
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Nope, you got it right.

Same thing happens in business. In business you have to pay a tax on any profit you make. In our business, we owe our state an annual $500 whether we make a profit or not, just for the priviledge of being allowed to do business. Then on top of that, we pay an inventory tax. We pay taxes on what we make after we sell an item, plus a tax on the value of the item before we sell it. We get double taxed on the same inventory!
 
starsevol said:
Nope, you got it right.

Same thing happens in business. In business you have to pay a tax on any profit you make. In our business, we owe our state an annual $500 whether we make a profit or not, just for the priviledge of being allowed to do business. Then on top of that, we pay an inventory tax. We pay taxes on what we make after we sell an item, plus a tax on the value of the item before we sell it. We get double taxed on the same inventory!
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That is absolute lunacy. My aunt who just passed away used to own a pet store in Maryland and ended up giving it up because Maryland's taxes made it nearly impossible for her to make a sustainable profit.

dragonmoon said:
we have already done taxes for this year and not had one here in Pa saying we owed anything
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We always get money back, even in spite of this, but the principle of it is rather irritating.
 
That has got to be the stupidest thing I've ever heard. :/ I'm sorry you're having to deal with that.
 
Hypancistrus said:
I'm trying to wrap my head around this.

So it seems kind of weird that they tax me on money they owed me in the first place.
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It makes perfect sense if you know how to think of it. Don't look at it as state "Taxes" you gave the state X amount of money out of every paycheck just in case at the end of the year you might owe them money. You didn't owe them as much as they thought you might so they gave you the extra back. The problem was they took their percentage of the money on a pretax basis and Uncle Sam did not get his bite of the apple on the amount you over paid because he thought it was someone else's now the knows different he wants his share.

This is how it was explained to me. It still does not make sense because if you made 500 dollars pre-tax and the State taxes you a percentage of that 500, Uncle Sam also taxes you a percentage of 500 not a percentage of 500 minus what the state took so technically he already got all of the money the was supposed to. You can also look at it that if I paid taxes on my paycheck then paid you to build me a snake rack then technically the money I give you has already been taxed but if you have to pay taxes on it the amount gets smaller. If you pay someone for a service or goods and they pay taxes on the same money the amount gets even smaller and so on until Uncle Sam has all of they money in taxes...don't get me started on economics.

This is why I try to keep my state withholdings to a minimum. I would rather pay in at the end of the year then give them an interest free loan that I get double taxed on.
 
Khaman said:
This is why I try to keep my state withholdings to a minimum. I would rather pay in at the end of the year then give them an interest free loan that I get double taxed on.
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Yes, I can kind of see the point of that now... that sort of thinking makes my head hurt!! :cry:
 
IL has the same thing. Fortunately, I didnt work in IL the previous couple years so didnt get any income tax. While doing my taxes when I read that I thought it was crazy too..
 
Oh, this isn't anything new at all. What gets me is that your "refund" is actually money that Uncle Sam "borrowed" from you INTEREST FREE. But now that he's "paying you back" that money, he taxes you again.
 
The_Thunderer said:
Oh, this isn't anything new at all. What gets me is that your "refund" is actually money that Uncle Sam "borrowed" from you INTEREST FREE. But now that he's "paying you back" that money, he taxes you again.
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Federal refunds are not taxed, so this isn't really true. State refunds are are supposed to be reported as income on Fed returns, and therefore are calculated into your year-end true up, but that "interest free loan" was to your state, not Uncle Sam.
 
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