This year Mary received a $200 refund of state income taxes that she deducted on her tax return last year. Mary included a total of $4,000 of state income taxes when she itemized deductions last year. What amount of the refund, if any, should Mary include in her gross income this year?

Question

Quizplus · Accepted Answer

Mary should include the $200 refund in her gross income only if her itemized deductions exceeded the standard deduction by at least $200 last year. This is because the refund represents a recovery of an amount previously deducted, and it is only taxable to the extent that it provided a tax benefit in the prior year.

This Year Mary Received a $200 Refund of State Income