In short
Under the tax benefit rule, recovering an amount deducted in an earlier year, such as a state income tax refund, is income in the year recovered, but only to the extent the earlier deduction reduced tax.
Key takeaways
- A refund is not income if the taxpayer took the standard deduction that year.
- If itemized deductions exceeded the standard deduction by less than the refund, only that excess is income.
- With the state and local tax cap, a refund is income only to the extent the capped deduction gave a benefit.
Where it's tested
REG: Individual Taxation: Gross Income — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
A taxpayer received a state income tax refund for a prior year in which the taxpayer claimed the standard deduction. The refund is: