William, a single taxpayer, has $3,500 state income tax withheld from his paychecks in 2017. When he filed his 2017 state income tax return on April 15, 2018, he calculated and received a $600 refund. The $600 refund was received on May 27, 2018. What are the federal tax effects of the state income tax events of 2017 and 2018?
I.If his itemized deductions including state income taxes total $6,600 in 2017, William includes $300 in gross income for 2018,
II.If he did not itemize his deductions in 2017, none of the refund is included in 2018 gross income.

Question

William, a single taxpayer, has $3,500 state income tax withheld from his paychecks in 2017. When he filed his 2017 state income tax return on April 15, 2018, he calculated and received a $600 refund. The $600 refund was received on May 27, 2018. What are the federal tax effects of the state income tax events of 2017 and 2018?
I.If his itemized deductions including state income taxes total $6,600 in 2017, William includes $300 in gross income for 2018,
II.If he did not itemize his deductions in 2017, none of the refund is included in 2018 gross income.
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Quizplus · Accepted Answer

Both statements are correct. In the first scenario, if William itemized deductions in 2017 and deducted the state income tax, then the refund he received in 2018 is taxable to the extent it provided a tax benefit. In the second scenario, if he did not itemize deductions in 2017, then the state tax refund received in 2018 is not taxable since it did not provide a tax benefit the previous year.

William, a Single Taxpayer, Has $3,500 State Income Tax Withheld