The past weekend, I started working on that annual royal pain in the *ss here -- the filing of our annual tax forms with the federal and state government. For the past like 15 or 20 years, I've used Turbo Tax from Intuit to do my taxes and this year is no exception.
I find it an interesting software market for them. They have a product that has built in obsolescence every year, used for just a few hours each year before needing an upgrade to handle the new tax rules the following year. This class of software probably has the highest cost in dollars per hour over any other software, including the bloated MS Office.
In any case, this year, as I was preparing my taxes, I ran across a problem where I paid Alternative Minimum Tax (AMT) last year and received a tax refund from state tax for that same tax year. Since AMT is in part impacted by the state taxes paid the same year, the tax refund that I received from the state could have a reduced tax liability because it was offset by the increased liability provided by AMT.
However, figuring this out is a tough exercise for most of us and it requires alot of re-work of the prior years taxes. This is exactly the kind of thing that the tax software should address as it's mostly just a recalculation issue. That wasn't to be the case with Turbo tax as all I got was:
At first I was just going to take the easy way out and assume that my refund was taxable. However, I decided to check it out so that I could share the experience with others here. I had to install the 2005 version of Turbo Tax, download and apply the latest updates, then had to add the refund amount into one location in the old form. After that, I copied two values from the revised 1040 and voila, the tax refund was not taxable. This is a very sizable difference and well worth the time. It is not hard, nor does it involve alot of calculations (I don't have a clue as to why they indicate it as such and I certainly don't understand why they can't do this calculation automatically).
Moral for the story, if you were subject to AMT and you have a sizable state tax return (probably anything over a few hundred dollars) you SHOULD do the extra calculations.