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#1
Old 12-29-2017, 11:16 PM
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Location: San Jose, CA
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State Tax return in 2018

At present 2017 I can deduct all state and local taxes paid in 2017. But in 2018 the deduction is capped at $10,000.
Presently if I use a Schedule A and deduct my state income tax, and get a state tax return then I have to declare the return as income. Example If in 2017 I deducted $2,000 for my 2016 taxes and then get a state return of $500 in 2017. When I fill out my 2017 tax forms I have to declare the $500 as income.


What will happen for 2018 tax year. Assume my state and local taxes total $11,000. My state income tax is $3,000. When I fill out my state tax forms I get a $1,000 return. I receive the return check in 2019. When I fill out my 2019 tax form will the full state return be taxable.

If so I either need to adjust my state tax deductions from so I do not get a return from the state, or pay my next property tax in the next two days to lower my combined state and local taxes for 2018.
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#2
Old 12-30-2017, 12:27 AM
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Join Date: Sep 2000
Posts: 7,653
Quote:
Originally Posted by Snnipe 70E View Post
At present 2017 I can deduct all state and local taxes paid in 2017. But in 2018 the deduction is capped at $10,000.
Presently if I use a Schedule A and deduct my state income tax, and get a state tax return then I have to declare the return as income. Example If in 2017 I deducted $2,000 for my 2016 taxes and then get a state return of $500 in 2017. When I fill out my 2017 tax forms I have to declare the $500 as income.


What will happen for 2018 tax year. Assume my state and local taxes total $11,000. My state income tax is $3,000. When I fill out my state tax forms I get a $1,000 return. I receive the return check in 2019. When I fill out my 2019 tax form will the full state return be taxable.

If so I either need to adjust my state tax deductions from so I do not get a return from the state, or pay my next property tax in the next two days to lower my combined state and local taxes for 2018.
The current law is that state income tax refunds are taxible only to the extent they were deducted in the previous year. I presume that hasn't changed.

So currently you declare the $500 refund as income because you deducted it the previous year.

If in 2019 you get a $1000 refund, but you did not deduct it in 2018, because it was over the $10000 max for SALT deductions or because you didn't itemize, then it is not taxable.
#3
Old 12-30-2017, 03:37 AM
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Join Date: Feb 2011
Posts: 3,870
The current law is that state refunds are taxable to the extent that you had a net tax benefit from them in the previous year.

For example, for 2017 the standard deduction for a single taxpayer is $6350. Let's say that you had $2000 in state income tax deductions and $5350 in other deductions, for a total of $7350. In 2018, you get a state income tax refund of $1500. Only $1000 would be taxable in 2018. Why? Because your deductions only came to $1000 over what the standard deduction would have been. Since you could have taken the standard deduction, the remaining $500 of your refund provided you with no net tax benefit.

I don't know of anything that has changed the net tax benefit rule.

So, in the example you gave in your post, you would have gotten no net tax benefit from the $1000 that was refunded, so it shouldn't be taxable.
#4
Old 12-30-2017, 07:16 PM
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Join Date: Aug 2008
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Alley Dweller hit on the key point: the tax benefit rule. This is the key to determining if any refund you receive is taxable income. It's only income if you deducted the outlay of cash on a previous return and the deduction reduced your tax liability or changed other tax attributes such as carryovers in your favor. In order to determine this, you look at what your tax return would have looked like if you had never had the refunded expense at all.

I've encountered some complex cases where our software does not make the correct distinction on some refunds because it's only programmed to look for very specific things; it would probably require a general AI to probably fully mechanize the full effects of the tax benefit rule. It's one of those things where it matters exactly why you paid or received certain money; here in Michigan, there's a Homestead Property Tax credit, and that's considered a refund of your property taxes that you might have deducted for some effect. But the tax credit is thrown onto the state tax return, where it combines with the income tax refund (or amount due). Sloppy preparers (or poor programming) may treat the entire of the tax refund as a return of income tax paid, which might give different results than treating the amount of the credit as a return of property tax paid. Or even worse (the case that I actually have to deal with), the software *always* treats it as an itemized deduction recovery if it was deducted and doesn't do the same calculation as it does when there's an income tax refund regarding whether there was any actual benefit to the deduction. And things like this are the real reason why taxes are complex to deal with and lots of people prefer to go to accountants than try to figure it all out themselves. The only tax reform that could change that is to return to an era of completely unfair tax regimes that don't take into account the situations that certain individuals might be in. In order to be fair, it has to be complex.
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