A cash basis taxpayer took an itemized deduction of $5,500 for state income tax paid in 2010.His total itemized deductions in 2010 were $18,000.In 2011,he received a $900 refund of his 2010 state income tax.The taxpayer must include the $900 refund in his 2011 Federal gross income in accordance with the tax benefit rule.

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According to the tax benefit rule, if a taxpayer claimed an itemized deduction for state income tax paid in a previous year and receives a refund in a later year, the refund must be included in the taxpayer's gross income for the year of the refund. In this case, the taxpayer must include the $900 refund in his 2011 Federal gross income because he claimed a deduction for state income tax paid in 2010.

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