Does anyone know if the EWP for closing a CD early is deductible on
my California state income tax return? Thank you.
Answers
Remember, the deduction is only offsetting the interest you earned on the CD, which you must include in your taxable income.
Even I have one this year and hope that the bank will deduct the EWP from my Taxable Interest Income upfront on my 1099 Form. Rather than me adding it as an income on my tax returns and claiming EWP as a deduction on the tax form.
I believe different banks have different formats of reporting it.
Interest earned minus EWP equal to your Constructively Received Taxable INTEREST Income.
No issue whatsoever on Federal Return, but you have to check California State Tax Code I know nothing about.
I don't know if California is a "bucket" Income Tax State and I don't know how the State Code is treating loses, would it allow to enter negative amount or force to enter zero in case if EWP exceeds the Interest Earned.
Playing with Tax software, the way of @greenback is a not a straight forward affair. Software creates different workbooks for Federal and State purposes and it doesn't know if the change on one form has to be propagated onto another. One would have to delete and recreate specific entry for 1099INT or manually adjust the Income amount on State workbook.
Therefore I suggested, comes to taxation, to go after the source or to follow qualified advise.
Far from every US Taxpayer is concerned about AGI, unless, as an example, "...Paralympic medals and USOC price money" is a part of the income received during the year taxable.
Where I pay State Income Tax, it is done in no reference to "Federal AGI" or the Taxable Income reported on US1040
I know nothing about California State Tax Code, but where it is said that "Federal AGI, after including all taxable interest income, which is carried over to the Ca return", it rather means that Californians pay State Tax on Social Security and Government Bonds Incomes.
While I know nothing about California State Tax Code, I seriously doubt that it is the case as per California State Tax Code.
The understanding is basic and superficial and if this is how Intuit software was coded - I'm sure it wasn't, explains why @greenback has a problems with that while doing nothing wrong.
I @greenback'S his approach, he is just using the wrong tool - the most overengineered, overcomplicated and overprized tax preparation software! I stopped using TurboTax because there is nothing "Intuit" in that. I realize it to be very user unfriendly to casual taxpayer.
Bottom line, I am not going to research every State Tax Law, but I suspect that for any State to have EWP taxed that State would have to legislate the definition of "Income".
it is needlessly technical - EWP has no placeholder on 1040, any schedules or forms. EWP reduction of 1099INT precedes AGI calculation and since it is not an "adjustment" makes no direct impact on AGI beyond being computed as a part of "Interest Income" and "Total Income" calculations.
I know nothing about California State Tax Code, therefore when it is said that CA Taxpayer has to transfer excess from Federal AGI into State return for the purpose of subtracting State Exempted Incomes, before calculating CA State Taxable Income, then let it be so in CA!
EWP issue is trivial - it is not taxable, it is not even reportable by taxpayer unless paper 1040 is used and the copy of 1099INT is attached.
I would not suggest reporting 1099INT as a single entry of recalculated "Box 1". It will raise the flag when IRS Supercomputers validates your return against all 1099s under your Social Security.
Eventually, IRS likely reconciles the difference, but the flag was there and your next return is automatically audited.
EWP issue by itself is trivial - be it West or East, Federal or State's, it is not taxable!
How about slightly more involved and entirely realistic - US taxpayer reporting Income as $1X of 1099NEC, $2X of 1099DIV and $3X of 1099INT; one of 1099INT includes $5X of EWP.
What would be the State Taxable Income for the Resident of CA? What would be the State Taxable Income for the Resident of NJ? What would be the State Taxable Income for the Resident of HI? What would be the State Taxable Income for the Resident of FL? At that rate Income would be taxed?
Hint, there are four different answers for the enjoyment of US Taxpayers.
I only know two of them, because, as disclosed, I know nothing about CA State Tax Code.
unfortunately, that is not a kind of audit that would provide any protective distraction for any mortals of us.
with all our funding, IRS has enough computing power to audit every taxpayer, domestic or global, in a matter of days, if not hours. I incidentally experienced that.
One omission, be it accidental or on purpose, and the computer generates the letter... very polite and very to the point.
stating that IRS disagrees with your return, therefore mortal is afforded the rights to dispute or to reconcile the difference, plus penalty, plus interest.
the right to dispute would last, but for the offer to pay the penalty and interest another, updated latter arrives in short period.
the lifetime is not enough to prevail in arguments and mortality wouldn't settle the dispute. the dispute gets inherited by the delinquent's estate and its beneficiaries.
once I complied and meticulously filled my next return, I received next year another latter anyway!
that letter simply stated that my return was accepted as filed and has Passed the Audit!!! the cost of the audit to the IRS is a few cents of utilities paid by mortals.
Interestingly enough, another mistake, actually triggered by incorrectly generated and later corrected 1099INT, resulted with the letter from IRS containing 1040 reconciliation and the check for overpayment, which i didn't cash but applied toward following year 1040.
Interestingly enough, my State hasn't followed up and I dint bother with State reconciliation because of the headache of filing amended return.
Then I calculated the difference between the Interest amount and EWP amount. Entered the difference amount only as the Income and removed the EWP amount from its box. The Federal Refund amount did not change, which is good. But I am surprised to see that the State Refund amount changed and went up !! I tried both options again to double-check if there was any error. At this point , the State tax is not accounting the EWP. I am not sure if the software expects me to complete the Fed part and go to the State part, where it it will again take that EWP and apply deduction on the last step and increase my State refund ( I doubt it ).
Apparently, the question posted by daylilly is still open.
Anybody can try this on any tax software they use and test this out. Just enter any Interest amount ( ex. 5k ) and EWP amount ( ex. 3k ). Note down the Fed and State tax due or refund amounts , which updates instantly / interactively. Then , remove both numbers and simply enter the interest income as 2k ( i.e. 5k - 3k ) and again note down the Fed and State tax due or refund amounts. They are supposed to be same. Aren't they ?
I am still researching this further to test it on other software to confirm. Appreciate if others can also share any inputs.
I hope taking EWP was not a bad decision with the simple assumption that you don't pay taxes on the income that you have not earned.
My suggestion is to further test, input it correctly and write down AGI and refund. Go to the state return and write down income and compare it to AGI on the 1040. Write down state refund amount. Then, input the difference only and write down AGI and refund. Go to the state return and write down income and compare it to AGI on the 1040. Write down state refund amount. The difference that you are referring to has to be a difference in AGI for some reason flowing to the state return. EWP reduces AGI. You need to end up with the same income amount (AGI) on both of the state returns. Is there a difference between the AGI on the federal returns? Probably not. Is there a difference between income on the state returns? I would think so, since you are reporting a difference. What is the difference and why? Do you see any adjustment being made on the state return for the EWP, when you compare the two state returns? Do you see any difference when you compare income on the two state returns?
Thanks for all the inputs. My previous comment on the EWP was about comparing the two interest amounts i.e. --
How "Net Interest" and "Gross Interest - EWP" are treated differently for the State by any tax software. Why is the Net Interest of 3k and (Gross Interest of 5k - 2k EWP) treated differently for the State. The difference that I noticed was the State Refund gets reduced when there is Gross - EWP v/s the Net. That results into a bit of loss of income ( or higher state tax ? ). I am not a tax expert. But with some basic calculation , anybody can quickly crosscheck by entering and removing those two interest amounts. However, the Fed refund amount remains unchanged in both scenarios. Consider the simple standard deduction , where AGI is same in both Fed and State.
This is for information purpose only.
it is not possible to to take the deduction of the ordinary expenses against ordinary incomes, such as wages, interest, dividends, capital gains, etc...
my impression is that to have such expenses itemized taxpayer needs to be qualified as professional; trader, broker, etc... there are specific qualification criteria.
otherwise, ordinary expenses as postage, mileage, drinkage, postage, commutage, etc...are built into standard deductions
You need to know exact answer, you'll have to spend a lifetime digging through Tax Codes.
Try manually adjusting Interest income on State portion of the return and report year later how it worked.
file Federal and State returns through different methods if you really into investing yourself.