A cash basis taxpayer took an itemized deduction of $5,500 for state income tax paid in 2015.His total itemized deductions in 2015 were $18,000.In 2016,he received a $900 refund of his 2015 state income tax.The taxpayer must include the $900 refund in his 2016 Federal gross income in accordance with the tax benefit rule.

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According to the tax benefit rule, if a taxpayer itemizes deductions and receives a refund of a previously deducted state income tax, the refund must be included in their gross income for the year they receive it. Since the taxpayer took a $5,500 deduction for state income tax in 2015, and received a $900 refund in 2016, the $900 must be included in his 2016 federal gross income.

A Cash Basis Taxpayer Took an Itemized Deduction of $5,500