A cash basis taxpayer took an itemized deduction of $5,500 for state income tax paid in 2016.His total itemized deductions in 2016 were $18,000.In 2017,he received a $900 refund of his 2016 state income tax.The taxpayer must include the $900 refund in his 2017 Federal gross income in accordance with the tax benefit rule.

Question

Quizplus · Accepted Answer

The tax benefit rule requires that if a taxpayer receives a refund of a previously deducted expense, the refund must be included in their gross income, to the extent that the deduction provided a tax benefit in the prior year. Since the taxpayer deducted $5,500 for state income tax paid in 2016 and received $900 back in 2017, he must include the $900 in his 2017 Federal gross income.

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