Anita receives a state income tax refund of $550 in May 2013.When she filed her 2012 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 2013,she may exclude it.What tax concept explains why the exclusion is permitted in this case?

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Quizplus · Accepted Answer

The tax benefit rule states that if an amount previously claimed as a deduction or credit on a prior tax return is subsequently recovered, then the recovery must be included in gross income to the extent that the tax benefit was received in the prior year. Since Anita used the standard deduction amount on her federal income tax return for 2012, she did not receive any tax benefit for the state income tax she paid. Therefore, the refund can be excluded from her federal gross income for 2013.

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