Question

Norma, who is single and uses the cash method of accounting, lives in a state that imposes an income tax. In April 2020, she files her state income tax return for 2019 and pays an additional $1,360 in state income taxes. During 2020, her withholdings for state income tax purposes amount to $4,760, and she pays estimated state income tax of $952. In April 2021, she files her state income tax return for 2020, claiming a refund of $2,448. Norma receives the refund in August 2021. Norma has no other state or local tax expenses. If an amount is zero, enter "0". a. Assuming that Norma itemized deductions in 2020, how much may she claim as a deduction for state income taxes on her Federal return for calendar year 2020 (filed April 2021)? $fill in the blank b. Assuming that Norma itemized deductions in 2020 (which totaled $27,700), how will the refund of $2,448 that she received in 2021 be treated for Federal income tax purposes? Norma will include $fill in the blank as income in 2021. c. Assume that Norma itemized deductions in 2020 (which totaled $20,000) and that she elects to have the $2,448 refund applied toward her 2021 state income tax liability. How will the $2,448 be treated for Federal income tax purposes? Norma will include $fill in the blankas income in 2021. d. Assuming that Norma did not itemize deductions in 2020, how will the refund of $2,448 received in 2021 be treated for Federal income tax purposes? Norma will include $fill in the blank as income in 2021.

Answer 1

A cash-basis taxpayer deducts state income tax in the year paid or withheld. Any refund of state income tax must be reported as in the income in the year received to the extent the taxpayer received a tax benefit from deducting the state income taxes in a prior year.

The income must be reported whether the taxpayer receives a cash refund or has the refund applied against state income taxes.

A) $4760 with held in 2020 + $952 estimated tax payment +  $1360 paid in 2020 for 2019 =$ 7072

B) The $2448 will be included in 2021 gross income to the extent the taxpayer derived a tax benefit from itemizing in 2020.

C) The $2448 will be included in 2021 gross income to the extent the taxpayer derived a tax benefit from itemizing in 2020, even if she elects to have the refund applied towards her 2018 state income tax.

D) If they did not itemize deduction in 2020 she is not revised to report any of the $2448 refunds as income in 2021.