William,a single taxpayer,has $3,500 state income tax withheld from his paychecks in 2016.When he filed his 2016 state income tax return on April 15,2017,he calculated and received a $600 refund.The $600 refund was received on May 27,2017.What are the federal tax effects of the state income tax events of 2016 and 2017?
I.If his itemized deductions including state income taxes total $6,600 in 2016,William includes $300 in gross income for 2017,
II.If he did not itemize his deductions in 2016,none of the refund is included in 2017 gross income.

Question

William,a single taxpayer,has $3,500 state income tax withheld from his paychecks in 2016.When he filed his 2016 state income tax return on April 15,2017,he calculated and received a $600 refund.The $600 refund was received on May 27,2017.What are the federal tax effects of the state income tax events of 2016 and 2017?
I.If his itemized deductions including state income taxes total $6,600 in 2016,William includes $300 in gross income for 2017,
II.If he did not itemize his deductions in 2016,none of the refund is included in 2017 gross income.
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Quizplus · Accepted Answer

When a taxpayer itemizes their deductions and receives a state income tax refund in the subsequent year, they may be required to include a portion of the refund in gross income. This is because they received a tax benefit in the previous year from deducting the state income tax paid, and any subsequent refund reduces that benefit. In statement I, if William itemized deductions and included $3,500 in state income taxes, then his tax benefit would have been reduced by $600 when he received the refund. Therefore, he must include that $600 as income in the subsequent year, per IRS rules. In statement II, however, if William did not itemize and did not receive a tax benefit in the previous year, then he does not need to include any of the refund in gross income. This is because the state income tax payments were not deductible in the previous year, and therefore there is no reduction in the tax benefit to be offset by the refund.

William,a Single Taxpayer,has $3,500 State Income Tax Withheld from His