Brad, who uses the cash method of accounting, lives in a state that imposes an income tax (including withholding from wages). On April 14, 2018, he files his state return for 2017, paying an additional $600 in state income taxes. During 2018, his withholdings for state income tax purposes amount to $3,550. On April 13, 2019, he files his state return for 2018 claiming a refund of $800. Brad receives the refund on June 3, 2019. If he itemizes deductions, how much may Brad claim as a deduction for state income taxes on his Federal income tax return for calendar year 2018 (filed in April 2019)?
A) $3,350
B) $3,550
C) $4,150
D) $5,150
E) None of the above

Question

Quizplus · Accepted Answer

Under the cash method of accounting, income is recognized when received and expenses are recognized when paid.

In 2018, Brad paid additional state income taxes of $600 when he filed his state return for 2017. This amount can be included as a deduction for 2018, since it was paid within that tax year.

In addition, Brad had state income tax withholdings for 2018 totaling $3,550. This amount can also be included as a deduction for 2018.

Therefore, the total amount of state income tax deduction that Brad can claim on his federal income tax return for 2018 is $4,150 ($600 + $3,550).

Brad, Who Uses the Cash Method of Accounting, Lives in a State