Sam, a single individual, took an itemized deduction of $5,500 for state income tax paid in 2018. His total itemized deductions in 2018 were $18,000. In 2019, he received a $900 refund of his 2018 state income tax. Sam must include the $900 refund in his 2019 Federal gross income in accordance with the tax benefit rule.

Question

Quizplus · Accepted Answer

Under the tax benefit rule, if a taxpayer received a tax benefit from a deduction in an earlier year and later receives a refund for that deduction, the refund must be included in gross income in the year received. In this case, Sam took an itemized deduction for state income tax paid in 2018, which gave him a tax benefit by reducing his taxable income for that year. When he received a $900 refund of that state income tax in 2019, he must include it in his gross income for 2019. Therefore, option A is true.

Sam, a Single Individual, Took an Itemized Deduction of $5,500