Tax Treatment of State and Local Tax Refunds
IRS clarifies using four examples
|State and local tax refunds… taxable or not…?? Let’s see…|
The IRS provided four examples illustrating how the long-standing tax benefit rule interacts with the new SALT limit to determine the portion of any state or local tax refund that must be included on the taxpayer’s federal income tax return. This does not affect state tax refunds received in 2018 for tax returns currently being filed.As in the past, state and local tax refunds are not subject to tax if a taxpayer chose the standard deduction for the year in which the tax was paid. But if a taxpayer itemized deductions for that year, part or all of the refund may be subject to tax, to the extent the taxpayer received a tax benefit from the deduction.
Taxpayers who are impacted by the SALT limit—those taxpayers who itemize deductions and who paid state and local taxes in excess of the SALT limit—may not be required to include the entire state or local tax refund in income in the following year. A key part of that calculation is determining the amount the taxpayer would have deducted had the taxpayer only paid the actual state and local tax liability.