Enter a pass-through entity tax (PTET) credit for a 1040 return

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Overview

Federal 1040 Schedule A limits the itemized deduction for state income taxes paid to $10,000. However, some states let partnerships and S corporations pay state taxes on behalf of a partner or shareholder. The partnership or S corporation can then take an itemized deduction on Form 1065 or Form 1120 for state income taxes paid that is not subject to the $10,000 limit. As a result, the amount of federal income that passes through from the entity reflects an itemized deduction for the entire amount of state taxes paid. The overall taxable income that the individual taxpayer reports on Form 1040 is then less than if the partnership or S corporation had not paid taxes on behalf of the Individual.

States that allow these pass-through entity tax (PTET) credits may do so by:

  • Reporting a credit on the state return for the tax paid by the pass-through entity, or
  • Reporting a subtraction on the state return for the income from the pass-through entity for which taxes have already been paid by the entity.

State-specific entry

Other state credit entry

The PTE decreases the amount of tax paid shown on a nonresident/part-year (NR/PY) return, which requires the amount to be adjusted (forced) on the STCR screen of the resident state.

Example

Taxpayer is a California nonresident and an Idaho resident.

On the CA return, tax is $10,000. Tax is reduced by $2200 for the PTE Credit as $2200 of the tax was paid by the PTE.

Form 540NR calculates a net tax of $7800, which transfers into 1040-Idaho (Resident), Screen IDSTCr, unit for California.

But, the preparer’s position might be that the tax paid by the taxpayer to CA was $10,000, not $7800. $7800 was paid via the 540NR return; the other $2200 was paid by the Pass-thru Entity.

Like any scenario where there is tax paid by a pass-through entity on behalf of an individual taxpayer (one such example is composite return), the user must manually enter the amount of tax paid on Screen XXSTCr in the state on which credit for taxes paid to other state will be claimed.

So, in this example, $7800 would transfer into 1040-IN Screen IDSTCr unit for CA. The user would then have to force that amount to $10,000 if they deemed that to be the appropriate amount on which to base the Other State Credit in Idaho.

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