A cash basis taxpayer took an itemized deduction of $5,500 for state income tax paid in 2014.His total itemized deductions in 2014 were $18,000.In 2015,he received a $900 refund of his 2014 state income tax.The taxpayer must include the $900 refund in his 2015 Federal gross income in accordance with the tax benefit rule.

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The taxpayer's 2014 taxable income was reduced by $5,500 as a result of paying the state income tax.Therefore,under the tax benefit rule,the $900 refund must be included in 2015 gross income.

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