Discussion:COLA for Sched. A tax ded.

From TaxAlmanac, A Free Online Resource for Tax Professionals
Note: You are using this website at your own risk, subject to our Disclaimer and Website Use and Contribution Terms.

From TaxAlmanac

Jump to: navigation, search

Discussion Forum Index --> Tax Questions --> COLA for Sched. A tax ded.


Natalie (talk|edits) said:

15 April 2006
Prior year tax preparer adjusted state income taxes deducted on Schedule A for pro-rated amount of COLA included in wages, i.e., state tax deducted is less than total amount of state taxes withheld on W2s. I have never heard of this before. Is there any basis for it? I think full amount of state income taxes should be deducted.

Bengoshi (talk|edits) said:

15 April 2006
I hadn't heard of this before too until I noticed my tax software automatically made this adjustment. I think because COLA isn't taxed federally, the state income tax withheld that relates to the COLA isn't deductible. But my software causes problems because it also adjusts the spouse's state taxes rather than just the spouse with the COLA.

Natalie (talk|edits) said:

15 April 2006
What software are you using? I couldn't find anything about this last night when I was looking on the irs.gov site. I'll have to check into this some more.

Taxea (talk|edits) said:

16 April 2006
Check the irs site it explains cola in detail. There is a formula to determine how much of the state withholding is due to cola. This amount is not deductible on the federal return because it is withheld to pay the cola taxes for the state. Cola is not taxed on the federal which is why the federal gross and state gross are different.

An adjustment is made on Sch A line 8 of the percentage as a minus figure. The cola percentage of the prior year refund is deducted on Sch A line 8 as a plus figure.

Natalie (talk|edits) said:

16 April 2006
Can you point me to a specific publication or article? I come up with 30 hits when I put "COLA" in the search.

Natalie (talk|edits) said:

16 April 2006
Okay. I finally found it. "You cannot deduct state and local income taxes you pay on income that is exempt from federal income tax, unless the exempt income is interest income." The example provided is the COLA that is not subject to federal income tax. Interestingly, I did not see this exception listed in the IRC that addresses the deduction for state taxes (164?).

Jdugancpa (talk|edits) said:

16 April 2006
Butttt, Sprite & DR Pepper are fully deductible. :) (Hey, give me a break. It's 7:25 pm on April 15th and I have 3 to go.)

Taxea (talk|edits) said:

17 April 2006
Natalie...I'll do you one better, here is the IRS info on cola



Media Relations Seattle, Washington Media Only: 206-220-5782 For Release: December 2005 Info Release SEA 05-18


COLA has an impact on the Federal income taxes of many Federal employees in Hawaii

If you are a civilian employee of the U.S. Government in Hawaii and receive a Federal cost-of-living allowance (COLA), you do not pay Federal income tax on your COLA. You need to be aware, however, that COLA has an impact on the amount of Federal tax you pay if you itemize deductions.

Part of State income tax paid is not deductible According to IRS Revenue Ruling 74-140, in effect since 1974, employees in Hawaii cannot deduct the portion of the Hawaii State income tax they pay that is allocable to a cost-of-living allowance exempt from Federal tax.

In other words, because you do not include your COLA in taxable income on your Federal tax return and do not pay Federal tax on it, you aren't eligible to take a deduction on your Federal tax return for Hawaii State income taxes paid on your COLA income.

Affects only taxpayers who itemize This ruling affects you only if you itemize deductions on your Federal tax return. If you claim the standard deduction, the ruling does not affect you.

Calculation to figure deductible portion of State income tax paid You may use the following calculation to figure the amount of your Hawaii State income tax to claim as an itemized deduction on your Federal tax return.

1) COLA = Percentage Attributable to COLA Federal Adjusted Gross Income + COLA

2) Percentage Attributable to COLA x Total State Income Tax Paid = Nondeductible Portion

3) Total State Income Tax Paid minus Nondeductible Portion = Deductible Portion

Example 1: In tax year 2005, you paid $5,000 in Hawaii State income tax and received COLA of $10,500. Your Federal adjusted gross income was $50,000.

1) $10,500 = 17%

	      $50,000 + $10,500

---more---


2) 17% x $5,000 = $850 Nondeductible Portion

3) $5,000 - $850 = $4,150, Deductible Portion on Your 2005 Federal Tax Return

Benefit the following year This works to your advantage the following year if you receive a Hawaii State income tax refund. When reporting the refund as taxable income on your Federal tax return, you can reduce your State refund by the same percentage you used to reduce your State tax deduction on your previous year's Federal tax return.

Calculation to figure amount of State refund to include as income You may use the following calculation to figure the amount of your Hawaii State income tax refund to declare as taxable income on your Federal tax return:

1) State Refund x Previous Year’s Percentage Attributable to COLA = Excludible Portion

2) State Refund minus Excludible Portion = Includible Portion

Example 2: Given the same facts as in Example 1, in 2006, you receive a refund of $590 from your 2005 Hawaii State income tax return.

1) $590 x 17% = $100 Excludible Portion 2) $590 - $100 = $490, Includible Portion on Your 2006 Federal Tax Return

Assistance from the Internal Revenue Service For general information regarding your Federal income tax return, you may call toll free at 1-800-829-1040, or you may visit your local IRS Taxpayer Assistance Center.

No affect on your Hawaii State tax return IRS Revenue Ruling 74-140 and the calculations described in this information release apply to Federal returns only. They do not affect your Hawaii State tax return.

Natalie (talk|edits) said:

17 April 2006
That is great! Thank you, Tax EA! Are you in Hawaii, too?

Taxea (talk|edits) said:

18 April 2006
How did you know? Yes, God's Country....Wahiawa Heights (born and raised) where we get the automatic air conditioning!

The biggest plus for us is that on the last day when the e-filing is so busy I just wait until after 9pm...the entire Mainland is done and e-filing is a breeze.

Taxea (talk|edits) said:

18 April 2006
Natalie...PS If you go into the Hawaii return, to the miscellaneous deductions, open it up and scroll up to the cola adjustment it tells you exactly what to put on Sch A ln 8 of the federal...don't even have to figure it yourself other than entering the actual amount of the cola.

Natalie (talk|edits) said:

18 April 2006
You're on now. I guess I was tipped off because you mentioned Hawaii in your response. But the real give away was when you said you had a "Portagee" moment in your other response. Thanks for the suggestions. I actually recalculate some of the numbers that come out in the software -- just to make sure I understand and that the program is working correctly.

Taxea (talk|edits) said:

18 April 2006
Actually, that Hawaii comment came from the IRS. We have so many govt employees here with cola I was really glad when the IRS put that out.

Where are you?

Natalie (talk|edits) said:

19 April 2006
The "other side of the island" . . . Hawaii Kai.

Natalie (talk|edits) said:

April 15, 2007
I'm working on the same client this year and had to refresh my memory on this. There's only one adjustment with respect to the COLA, correct? In other words, I do not deduct part of the state taxes on the federal return because the COLA wages were not taxable for federal purposes. Then for Hawaii I report the full amount of SWT. There's not another adjustment on the Hawaii return, is there? The reason I ask is I think I accidently left an adjustment on the Hawaii return last year under miscellaneous deductions that I should not have.

Bengoshi (talk|edits) said:

15 April 2007
I believe you're correct Nat. An adjustment on the fed return that reduces the deductible portion of state income taxes paid. I think the full amount of state income taxes paid are deductible on the state return... I use Ultratax and the federal computation was something like:
 1.  (COLA) / ( Fed AGI + COLA ) =  COLA Adj. %
 2.  (COLA Adj. %) x State Inc. Taxes = Nondeductible Amount
 3.  State Inc. Taxes - Nondeductible Amt = Deductible Amt

Natalie (talk|edits) said:

April 15, 2007
Thanks Bengoshi. I just wanted to make sure I got it right. I guess last year I had entered an adjustment, found the correct way to do it and then forgot to take out the original adjustment. Luckily the amount is not significant.

To join in on this discussion, you must first log in.
Personal tools