Q: I am still confused about why a state income tax refund must be declared as income on my federal income tax return. For 1984, I paid $600 in estimated tax to the state of Maryland; my actual tax turned out to be $450, and this is the amount I declared on my federal return as part of my deductions. How does the $150 refund become income to be reported the following year, since I was only getting a refund of my overpayment?

A: You're confused because you have been reporting the state income tax deduction incorrectly. You're not alone; I suspect that this is the single area that generates the most confusion among taxpayers.

For 1984, the correct Schedule A deduction on your federal return for state income taxes paid was $600 -- the amount the state actually withheld from your pay check or the amount you paid to the state during 1984. You should not claim as a deduction the net tax liability of $450.

In fact, if you follow the instructions for completing the Maryland state tax return, you can't make this mistake. Right on the front cover of the Maryland form is this important instruction: "Prepare your state return after you prepare your federal return."

If you follow this instruction, you won't even know what your state tax liability is when you are working on federal Schedule A.

If you're waiting to claim the 1984 state tax liability on your 1985 federal return, you're a year behind, because you actually paid that $600 in 1984 even though the precise amount of your state tax liability wasn't determined until 1985.

Obviously, there is a relationship between the $600 reported as paid and the requirement to report the $150 refund as income. If you had properly claimed the $600 as a deduction on your 1984 federal return, then the $150 refund is properly reportable as income on your 1985 federal return.

Since you are only claiming the $450 as a deduction, however, you should not report the $150 as income. You are only required to report a state tax refund as income to the extent that you received a tax benefit from claiming the tax paid as a deduction. But please get caught up for future years.

Q: I do not understand the answer to the last question in a recent column, in which you wrote that a worker over age 70 1/2 could contribute up to $2,000 to his wife's spousal IRA until she reached that age. I thought only $250 could be contributed for a 69-year-old wife who is not working. Have I missed something?

A: Yes. The normal IRA limit for a worker is $2,000; with a nonworking spouse, that ceiling is $2,250. But a contribution to the spousal IRA is not limited to that extra $250.

Instead, the $2,250 may be split between the worker's IRA and the spouse's IRA in any proportion they wish, except that not more than $2,000 may be contributed to either account.

So for a worker who does not qualify because he (or she) is over-age but whose nonworking spouse is still under age 70 1/2, the limit on that single-account ceiling is $2,000.

Q: A wage-earner over age 70 1/2, with a wife who is 65, has never had an IRA. (They file a joint tax return.) Now he would like to open a spousal IRA for his wife, who has no earned income, contributing the maximum $2,000 to the wife's IRA each year until she reaches age 70 1/2. Is this allowed?

A: Yes. As long as the husband has qualifying earned income each year of at least $2,000, he may deposit up to $2,000 in his wife's IRA until the year she reaches age 70 1/2. The fact that he hadn't started her IRA before he reached 70 1/2 has no bearing on present eligibility.