A cash basis taxpayer took an itemized deduction of $5,500 for state income tax paid in 2017. His total itemized deductions in 2017 were $18,000. In 2018, he received a $900 refund of his 2017 state income tax. The taxpayer must include the $900 refund in his 2018 Federal gross income in accordance with the tax benefit rule.

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According to the tax benefit rule, if a taxpayer receives a refund for a previously deducted expense that provided a tax benefit in a prior year, the refund must be included in the taxpayer's gross income for the year of the refund. In this case, the taxpayer received a refund for state income tax paid in 2017, which was previously deducted on his 2017 tax return, providing a tax benefit. Therefore, the $900 refund must be included in his 2018 gross income.

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