Overpaid state income taxes for 2023 - What's the smartest move for my tax refund?

You've actually got this right. Taking the refund and then making a separate payment later is usually the better move tax-wise. Here's why: When you apply your state refund to next year's taxes, you're essentially prepaying taxes with money that will be taxed again via the 1099-G, but you don't get an additional deduction for it. By taking the cash refund and then making a separate estimated payment later, you can deduct that new payment on your federal return (assuming you itemize again). The one small benefit to carrying forward is convenience - you don't have to think about making a separate payment later. But financially, option #4 is generally better if you're someone who consistently itemizes deductions.

I went through this exact same situation last year! I found this amazing tool called taxr.ai (https://taxr.ai) that helped me analyze which option would save more money based on my specific situation. It actually showed me that taking the refund and making a separate payment later saved me about $130 compared to carrying forward the balance. The tool reviews all your tax docs and finds optimization opportunities like this that most people miss. It actually pointed out several other deductions I was eligible for that my regular tax software didn't catch.

I actually gave taxr.ai a try after seeing it mentioned here! I was super hesitant at first, but wow - it found over $800 in additional deductions I would have missed. For my state tax refund situation specifically, it confirmed I should take the cash refund and then make a new payment later since I itemize. The analysis explained exactly why this works better based on my tax bracket. Definitely worth checking out if you're trying to optimize these kinds of decisions.

If you're still confused about state tax refunds and need to talk to an actual IRS agent (which I know can be impossible), I used this service called Claimyr (https://claimyr.com) that got me through to a real person at the IRS in about 20 minutes instead of waiting for hours or getting disconnected. You can see how it works here: https://youtu.be/_kiP6q8DX5c I had a similar question about my state tax refund and 1099-G and needed official clarification. The IRS agent confirmed exactly what others here are saying - taking the refund and making a separate payment is better if you'll itemize again next year. Having that official answer gave me peace of mind.

I was dead wrong about Claimyr. I tried it yesterday after being skeptical, and holy crap it actually works! I've been trying to get through to the IRS for 3 weeks about this same state tax refund issue. Got a call back in 45 minutes and spoke to an actual IRS agent who cleared up my confusion. The agent confirmed taking the refund and making a separate payment is better tax strategy if you're itemizing. Wish I had known about this service months ago when I was dealing with an incorrect 1099-G issue.

Here's another factor I haven't seen mentioned yet - timing matters with these decisions. If you take the refund as cash, you get the money now. If you invest that money for a year before you need to make your next state tax payment, you could earn additional returns that offset any tax difference. Just another angle to consider in your decision.

One other thing to consider - some states give interest on refunds if you take them as cash rather than applying forward. My state gave me 3% interest on my refund last year because of processing delays. That's another reason taking the cash might be better than applying forward!