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Seriously? It's exactly what I said. Let's review:
Did you catch the part about "deducted it fully?" Should that be double highlighted?
RIF
You can highlight it in 15 beautiful colors and hot glue some sequins on if you like. Nonetheless, you only report a refund as income to the extent you derived a tax benefit. It is not correct that any state taxrefund is automatically 100% taxable.
You can highlight it in 15 beautiful colors and hot glue some sequins on if you like. Nonetheless, you only report a refund as income to the extent you derived a tax benefit. It is not correct that any state taxrefund is automatically 100% taxable.
Yeah, that’s what “deducted it fully” means.
I never said a refund is automatically 100% taxable.
I never said a refund is automatically 100% taxable.
Again, RIF.
There is no need to be in "violent agreement" over a semantic quibble. I think the issue is the definition of "deduct". If you listed more SALT in 2018 than the allowed amount, I think Petunia might consider that as a "deduction" even if the final number for your fed tax liability is calculated based on the cap of SALT that you can use to calculate your fed taxes. I don't know. Move on!
I never said a refund is automatically 100% taxable.
Again, RIF.
Yet again, the key is the derived tax benefit, not how much was deducted.
If I am mfj and have a total of 26k itemized deductions, of which 6k is for state income tax, then I derive benefit on 2k. If I receive a state income tax refund of 3k, I report only 2k as income. It does not matter that I deducted 6k; it matters that I derived benefit on 2k.
And, yes you did say 100% taxable. See your own post #4.
Yet again, the key is the derived tax benefit, not how much was deducted.
If I am mfj and have a total of 26k itemized deductions, of which 6k is for state income tax, then I derive benefit on 2k. If I receive a state income tax refund of 3k, I report only 2k as income. It does not matter that I deducted 6k; it matters that I derived benefit on 2k.
I'm not interested in a new scenario, go back and read the OP that I responded to, and note the highlights. I understood that to mean that total itemized exceeded the STD by at least the $1,000 of the state tax refund. If that is indeed the case, I'm 100% correct in what I've been saying. If that's not the case, then I'm wrong.
Quote:
Originally Posted by SK44
Does anyone know how the IRS will treat a state income tax refund as income for Tax Year 2019 now that the Tax Cuts (sic) and Jobs Act of 2017 has capped SALT deductions?
For example, for 2019, say I have $15,000 in property tax, $5,000 in state tax and $5,000 in local tax. That’s $25,000 I would enter on Schedule A, but only $10,000 is deductible. But then I got a $1,000 state refund for 2018 that was paid to me in 2019. Under the old rules, I would have to add this $1,000 to my income for 2019.
However, now with the cap, will the IRS somehow pro-rate this refund as income? So they could say, yes while you had only $10,000 in SALT that you could deduct, the state tax is actually a percentage of this and therefore the same percentage of the refund must count as income.
Would it be legal for me to just not list the state taxes on Schedule A and sidestep the issue? The property tax and local tax is already over the $10k cap so omitting the state tax would not affect the amount I could deduct. My total schedule A deductions are over the $24 standard deduction even with the 10K SALT cap.
Not sure there is an IRS rule on this as it won’t be an issue until the April 2020 tax season.
Thanks.
Quote:
And, yes you did say 100% taxable. See your own post #4.
Not in general, in the situation that I was responding to (see above).
My understanding of the tax benefit rule is that you would do a with and without calculation on the original return to determine how much of a benefit was received and what might be includible.
Using the figures from the OP, the original return would show $25,000 of state and local taxes of which $10,000 would be deductible. Doing the without calculation would leave $24,000 of state and local taxes of which $10,000 would be deductible.
Since the additional $1,000 state tax deduction did not produce any benefit, the refund would not be includible in income.
My understanding of the tax benefit rule is that you would do a with and without calculation on the original return to determine how much of a benefit was received and what might be includible.
Using the figures from the OP, the original return would show $25,000 of state and local taxes of which $10,000 would be deductible. Doing the without calculation would leave $24,000 of state and local taxes of which $10,000 would be deductible.
Since the additional $1,000 state tax deduction did not produce any benefit, the refund would not be includible in income.
My conclusion was based in part on the following highlighted portion.
Is my analysis wrong?
Quote:
Originally Posted by SK44
<<SNIP>>
Would it be legal for me to just not list the state taxes on Schedule A and sidestep the issue? The property tax and local tax is already over the $10k cap so omitting the state tax would not affect the amount I could deduct. My total schedule A deductions are over the $24 standard deduction even with the 10K SALT cap.
Not sure there is an IRS rule on this as it won’t be an issue until the April 2020 tax season.
My conclusion was based in part on the following highlighted portion.
Is my analysis wrong?
Itemized deductions are over $24k but only $10k of that amount is state and local taxes, so there must be > $14k of deductible interest, medical, charitable, whatever.
Doing the with and without calculation, you still wind up with $10k of state and local taxes that are deductible, so the $1k that was refunded did not provide a tax benefit and therefore would not be includible in income.
The IRS has finally published guidance on this issue. It appears to be along the lines of what I had concluded previously.
Section 111.—Recovery of Tax Benefit Items
26 CFR 1.111-1: Recovery of certain items previously deducted or credited.
(Also: § 164; 1.164-1.)
Rev. Rul. 2019-11
ISSUE
If a taxpayer received a tax benefit from deducting state and local taxes under
section 164 of the Internal Revenue Code in a prior taxable year, and the taxpayer
recovers all or a portion of those taxes in the current taxable year, what portion of the
recovery must the taxpayer include in gross income?
FACTS
In Situations 1 through 4 below, the taxpayers are unmarried individuals whose
filing status is “single” and who itemized deductions on their federal income tax returns
for 2018 in lieu of using their standard deduction of $12,000. The taxpayers did not pay
or accrue the taxes in carrying on a trade or business or an activity described in section
212. For 2018, the taxpayers were not subject to alternative minimum tax under section
55 and were not entitled to any credit against income tax. The taxpayers use the cash
receipts and disbursements method of accounting.
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Situation 1: Taxpayer A paid local real property taxes of $4,000 and state
income taxes of $5,000 in 2018. A’s state and local tax deduction was not limited by
section 164(b)(6) because it was below $10,000. Including other allowable itemized
deductions, A claimed a total of $14,000 in itemized deductions on A’s 2018 federal
income tax return. In 2019, A received a $1,500 state income tax refund due to A’s
overpayment of state income taxes in 2018.
Situation 2: Taxpayer B paid local real property taxes of $5,000 and state
income taxes of $7,000 in 2018. Section 164(b)(6) limited B’s state and local tax
deduction on B’s 2018 federal income tax return to $10,000, so B could not deduct
$2,000 of the $12,000 state and local taxes paid. Including other allowable itemized
deductions, B claimed a total of $15,000 in itemized deductions on B’s 2018 federal
income tax return. In 2019, B received a $750 state income tax refund due to B’s
overpayment of state income taxes in 2018.
Situation 3: Taxpayer C paid local real property taxes of $5,000 and state
income taxes of $6,000 in 2018. Section 164(b)(6) limited C’s state and local tax
deduction on C’s 2018 federal income tax return to $10,000, so C could not deduct
$1,000 of the $11,000 state and local taxes paid. Including other allowable itemized
deductions, C claimed a total of $15,000 in itemized deductions on C’s 2018 federal
income tax return. In 2019, C received a $1,500 state income tax refund due to C’s
overpayment of state income taxes in 2018.
Situation 4: Taxpayer D paid local real property taxes of $4,250 and state
income taxes of $6,000 in 2018. Section 164(b)(6) limited D’s state and local tax
deduction on D’s 2018 federal income tax return to $10,000, so D could not deduct
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$250 of the $10,250 state and local taxes paid. Including other allowable itemized
deductions, D claimed a total of $12,500 in itemized deductions on D’s 2018 federal
income tax return. In 2019, D received a $1,000 state income tax refund due to D’s
overpayment of state income taxes in 2018.
LAW AND ANALYSIS
Section 164 generally provides an itemized deduction for certain taxes paid or
accrued during the taxable year. Section 164(a) provides a deduction for (1) state and
local, and foreign, real property taxes; (2) state and local personal property taxes; (3)
state and local, and foreign, income, war profits and excess profits taxes; and (4) the
generation-skipping transfer tax imposed on income distributions. Section 164(a) also
provides a deduction for state and local, and foreign, taxes not previously described that
were paid or accrued within the taxable year in carrying on any trade or business or an
activity described in section 212 (relating to expenses for production of income).
Section 164(b)(5) allows a taxpayer to elect to deduct state and local general sales
taxes in lieu of state and local income taxes.
Section 164(b)(6), as added by section 11042 of the “Tax Cuts and Jobs Act”
(the “Act”), Pub. L. 115-97, limits an individual’s deduction for the aggregate amount of
state and local taxes paid during the calendar year to $10,000 ($5,000 in the case of a
married individual filing a separate return). The dollar limitations apply to taxable years
beginning after December 31, 2017, and before January 1, 2026, but they do not apply
to foreign taxes described in section 164(a)(3) or to any taxes described in section
164(a)(1) and (2) that are paid or accrued in carrying on a trade or business or an
activity described in section 212.
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Section 111(a) excludes from gross income amounts attributable to the recovery
during the taxable year of any amount deducted in any prior year to the extent the
amount did not reduce the amount of tax imposed by Chapter 1 of the Code. Section
111 partially codifies the tax benefit rule, which generally requires a taxpayer to include
in gross income recovered amounts that the taxpayer deducted in a prior taxable year to
the extent those amounts reduced the taxpayer’s tax liability in the prior year. See Rev.
Rul. 93-75, 1993-2 C.B. 63.
If the taxpayers in Situations 1 through 4 had paid only the proper amount of
state and local tax in the prior taxable year, their itemized deductions may have been
lower or they may have opted for the standard deduction. Thus, the taxpayer in each
situation must determine the amount of itemized deductions that the taxpayer would
have deducted in the prior year had the taxpayer paid only the proper amount of tax.
The taxpayer must then compare this amount to the total itemized deductions actually
taken on the return, or the standard deduction that could have been taken on the return,
and include the difference as income on the current year return if the taxpayer received
a tax benefit in the prior taxable year from that itemized deduction.
Situation 1: State income tax refund fully includable. In 2019, A received a
$1,500 refund of state income taxes paid in 2018. Had A paid only the proper amount
of state income tax in 2018, A’s state and local tax deduction would have been reduced
from $9,000 to $7,500 and as a result, A’s itemized deductions would have been
reduced from $14,000 to $12,500, a difference of $1,500. A received a tax benefit from
the overpayment of $1,500 in state income tax in 2018. Thus, A is required to include
the entire $1,500 state income tax refund in A’s gross income in 2019.
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Situation 2: State income tax refund not includable. In 2019, B received a $750
refund of state income taxes paid in 2018. Had B paid only the proper amount of state
income tax in 2018, B’s state and local tax deduction would have remained the same
($10,000) and B’s itemized deductions would have remained the same ($15,000). B
received no tax benefit from the overpayment of $750 in state income tax in 2018.
Thus, B is not required to include the $750 state income tax refund in B’s gross income
in 2019.
Situation 3: State income tax refund partially includable. In 2019, C received a
$1,500 refund of state income taxes paid in 2018. Had C paid only the proper amount
of state income tax in 2018, C’s state and local tax deduction would have been reduced
from $10,000 to $9,500 and as a result, C’s itemized deductions would have been
reduced from $15,000 to $14,500, a difference of $500. C received a tax benefit from
$500 of the overpayment of state income tax in 2018. Thus, C is required to include
$500 of C’s state income tax refund in C’s gross income in 2019.
Situation 4: Standard deduction. In 2019, D received a $1,000 refund of state
income taxes paid in 2018. Had D paid only the proper amount of state income tax in
2018, D’s state and local tax deduction would have been reduced from $10,000 to
$9,250, and, as a result, D’s itemized deductions would have been reduced from
$12,500 to $11,750, which is less than the standard deduction of $12,000 that D would
have taken in 2018. The difference between D’s claimed itemized deductions ($12,500)
and the standard deduction D could have taken ($12,000) is $500. D received a tax
benefit from $500 of the overpayment of state income tax in 2018. Thus, D is required
to include $500 of D’s state income tax refund in D’s gross income in 2019.
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HOLDING
If a taxpayer received a tax benefit from deducting state or local taxes in a prior
taxable year and the taxpayer recovers all or a portion of those taxes in the current
taxable year, the taxpayer must include in gross income the lesser of (1) the difference
between the taxpayer’s total itemized deductions taken in the prior year and the amount
of itemized deductions the taxpayer would have taken in the prior year had the taxpayer
paid the proper amount of state and local tax or (2) the difference between the
taxpayer’s itemized deductions taken in the prior year and the standard deduction
amount for the prior year, if the taxpayer was not precluded from taking the standard
deduction in the prior year. This holding applies to the recovery of any state or local tax,
including state or local income tax and state or local real or personal property tax.
DRAFTING INFORMATION
The principal author of this revenue ruling is Amy S. Wei of the Office of
Associate Chief Counsel (Income Tax & Accounting). For further information regarding
this revenue ruling, contact Amy S. Wei at (202) 317-7011 (not a toll-free call).
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Look for this from the IRS IssueNumber: IR-2019-59
Withnew SALT limit, IRS explains tax treatment of state and local tax refunds
Basically if you did not get a deduction in the prior year you do not pay tax on a refund.
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