TurboTax Meets the Oregon Kicker -- The Sequel
Some of the shortcomings of the TurboTax tax preparation program became apparent this winter when many Oregon taxpayers discovered that they had donated their huge Oregon income tax "kicker" refunds to the state school fund, without realizing they had done so. The state Department of Revenue offered folks in that position a return of their "kicker," but only if they had filed electronically. If they printed out their TurboTax return on paper last year and sent it in with the donation box checked, it's tough luck from Salem, even though what appeared on the screen immediately before the taxpayers hit the print button did not match what came out of their printer. We're big TurboTax fans at our house, but that's a big Strike 1.
Fortunately, we didn't commit that blunder, and we got our "kicker" check just fine. (Spent it fine, too.) But now it's time to do our 2007 tax returns using TurboTax, and, well, the software's not handling the "kicker" very well. At all.
There's been quite a bit of Googling going on the last few weeks by Oregonians wondering if they have to count the "kicker," which they received in December 2007, as income on their 2007 tax returns. The answer to that question has been published in several places, but before getting to our latest TurboTax story, let's see if we can take our own crack at the tax law itself.
First of all, the "kicker" is a refund of 2006 Oregon state income taxes. As a state income tax refund, it is not taxable on one's Oregon tax returns, period. Oregon income taxes don't do you any good on your Oregon income tax return when you pay them, and so when you get them refunded, you don't have to declare the refund as taxable on your Oregon return.
As for your federal return, however, it ain't necessarily so. The taxability of the refund depends in part on whether you itemized your deductions or took the standard deduction on your 2006 federal return (filed about a year ago). If you took the standard deduction -- that is, you didn't itemize deductions -- you can ignore the "kicker" entirely. But if you itemized on your 2006 return (last year), you generally have to report the "kicker" as taxable income on your 2007 federal return (which people are filling out now), because you deducted your Oregon income tax on your federal return last year.
It's the same as any garden-variety Oregon income tax refund that one might get, even in a non-"kicker" year. Itemizers generally get a federal tax break when they deduct what they paid to the state, and so they have to report income to the feds when they get the state money back. (Folks in sales tax states have a different analysis, but in Oregon -- even in tax-happy Portland -- we needn't worry about that. Yet, anyway.)
There are some exceptions to the rule just stated. Even if you itemized, you don't have to report the "kicker" refund (or any other refund) as income if it didn't give you any tax benefit on a prior tax return. And if, like us and lots of other middle- and upper-class folks, you're subject to the federal alternative minimum tax (AMT), it may turn out that the state income tax deduction you technically took last year on your 2006 federal return didn't save you any tax, because it's not deductible for AMT purposes. Alternatively, some upper-middle- and high-income folks may be able to keep part of the "kicker" off this year's return, even if they weren't subject to the AMT last year, on the ground that the deduction they took for their state income tax on their 2006 federal return was scaled back by the nasty little "phase-down" that cuts back on your federal itemized deductions because you made "too much" money. ("Too much" was defined in 2006 at roughly $150,000 for a married couple.)
If you're in either of these exception areas, the calculations you'll need to go through to figure out how much of your "kicker" is taxable are daunting. But hey, that's why you pay 40 bucks for TurboTax, right? It does all the wicked number-crunching for you, doesn't it?
In this case, don't get your hopes up. We've been trying to get TurboTax 2007 (out of a box, updated constantly on line) to cope with the "kicker," and we've been having a hard time. For one thing, the program doesn't even know that the "kicker" exists. If you also used TurboTax for your 2006 returns, TurboTax 2007 has your Oregon income tax for that year already scoped out to the penny, but unfortunately that's as of last spring, before the "kicker" was announced. As far as we can tell, the program doesn't really have a place to deal with the "surprise" refund -- it's sure you weren't entitled to an Oregon refund, or at least none further than the one you got last spring. And so when you start to tell it about the "kicker," it can't deal with it. We've had to resort to right-clicking several boxes and telling TurboTax to override itself and accept the numbers we're entering rather than the ones it's filling in automatically. That's never a good feeling.
What's worse, if you paid AMT in 2006, TurboTax is offering you no help with the calculations -- nada. You need to go back and figure out on your own your 2006 regular federal tax and AMT without the deduction for the amount you eventually got "kicked back" from Oregon. If that recomputed tax is higher than what those two taxes together actually turned out to be, then the deduction actually saved you some federal tax, and you have put at least part of the "kicker" down as federal income. The way we dealt with it (and we think it's right) was to re-open last year's TurboTax program (which we were smart enough not to uninstall), recompute our 2006 regular tax and AMT without the deduction, and compare it to the 2006 actual federal taxes. In our case, the total tax was the exact same amount with and without the deduction, and so we won't be putting the "kicker" down as income in 2007 after all, even though we itemized last year. (Importantly, we did not save the revised 2006 returns we just created on TurboTax, because they were for hypothetical calculation purposes only, and we didn't want to erase our electronic files of our actual 2006 returns. Saving would have done that.)
When the tax system gets so screwed up that a smart program like TurboTax can't cope with it, we should all feel a little embarrassed. But we're also sensing some real weaknesses in that particular tax prep software as it tries to deal with the quirks of the many different states in which it is sold. We're up to at least Strike 2.
Oh, and one final point on this one. If you do have to report your "kicker" as income on your 2007 federal return, and you file the long form in Oregon, don't forget to subtract the "kicker" out, as indicated, on your 2007 Oregon return. It's line 15 of Form 40.
UPDATE, 2/8, 11:07 p.m.: TurboTax has sent us this pdf file, which instructs users on how to enter the Oregon "kicker" onto the program for purposes of their 2007 federal tax returns. It works if you use TurboTax in the "Interview" mode. If, like us, you use TurboTax in the "Forms" mode, this won't do you much good. They've also sent us an explanation of how you can make it work in the "Forms" mode, and when we get a chance, we'll try it and report back.
UPDATE, 2/11, 3:00 p.m.: It turns out that TurboTax will do all the dirty AMT and "phase-down" calculations for you, but you have to know what to tell the program, and how. A full explanation is available here.