This year Mary received a $575 refund of state income taxes that she deducted on her tax return last year. Mary included a total of $7,250 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 refund in her gross income only if her itemized deductions exceeded the standard deduction by at least the amount of the refund ($575). This is due to the tax benefit rule, which states that a refund is taxable only to the extent that it provided a tax benefit in the previous year.

This Year Mary Received a $575 Refund of State Income