Question

Myrna and Geoffrey filed a joint tax return in 2018. Their AGI was $85,000, and itemized deductions were $24,700, which included $7,000 in state income tax and no other state or local taxes. In 2019, they received a $1,800 refund of the state income taxes they paid in 2018. The standard deduction for married filing jointly in 2018 was $24,000. Under the tax benefit rule, what amount of the state income tax refund is included in gross income in 2019?

Answer 1

Tax Refund:

A refund of tax paid back to the taxpayer if it exceeds taxes paid in the current year or tax overpaid.

 

State Taxes Refund:

It is not taxable if any deductions are claimed in previous year as standard deduction. If the itemized deductions are used in previous year it is taxable in the current year.

Calculation of State Tax Refund Exclusion as Gross Income:

The value obtained are as follows:

A	B
Calculation of States Taxes Refund Inchusion
Particulars Amounts	Amounts
Itemized Deduction-2019	$24,700
(-) Standard Deduction – 2018	$24,000
Gross Income Inchusion	$700

 

The formulas used in the calculation are as follows:

A	B
Calculation of States Taxes Refund Inchusion
Particulars Amounts	Amounts
Itemized Deduction-2019	$24,700
(-) Standard Deduction – 2018	$24,000
Gross Income Inchusion	=B3-B4

 

Based on the above calculations state tax refund in gross income inclusion is $700.

 

Conclusion:

Tax refund is refund of excess tax collected which is paid back to the taxpayer. If the taxpayer claims standard deduction in any previous year then it is treated as tax benefit.

 

State tax refund is taxable and included in gross income only when itemized deductions are claimed in previous year.

State tax refund is taxable and included in gross income only when itemized deductions are claimed in previous year.