Anita receives a state income tax refund of $550 in May 2017.When she filed her 2016 federal income tax return,she used the standard deduction amount.Although the all-inclusive income concept would require Anita to report the $550 in her federal gross income for 2017,she may exclude it.What tax concept explains why the exclusion is permitted in this case?

Question

Quizplus · Accepted Answer

The tax benefit rule allows taxpayers to exclude from income any refunds of state income taxes if they did not receive a tax benefit from deducting those taxes in a prior year. Since Anita used the standard deduction for her federal income tax return in 2016, she did not receive a tax benefit from the state income taxes she paid, and therefore she may exclude the refund from her federal gross income for 2017.

Anita Receives a State Income Tax Refund of $550 in May