State income tax refund mostly due to state tax credits, still being taxed on federal return

[JamesVDale]

Suppose my 2023 State Income Tax was $12,000.  Due to SALT I can only deduct $10,000 on Federal 1040 Schedule A.  In 2023 I donated money to some Georgia Rural hospitals for the amount of $4000.  This is just a redirection of state taxes and so I receive a tax credit for the full $4000 on my Georgia state return.  Then in 2024 I received a refund of GA taxes for $5000, but recall that $4000 of this was due to those hospital donations I had made earlier.  I did NOT include those donations as charitable contributions on my Federal 1040 Schedule A.

My question is why is the full $5000 of the state refund considered when calculating the taxable amount of that refund on my 2024 Federal Return?  If I had NOT made those donations, my refund would only be $1000 and that would still leave my "effective" state income tax on Schedule A as $11000, and so still above SALT and hence none of the refund would be taxable.  But because it was $5000, it makes my effective state income tax on schedule A $7000 and so I am now being taxed on the $3000 difference between what I deducted in 2023 ($10000 due to SALT) and what the Federal return now considers what I should have deducted?

Am I thinking about this correctly?

Thanks, James

[fanfare]

"a tax credit for the full $4000 on my Georgia state return.  "

not relevant for purposes of state tax deduction on Schedule A and refund of same.

"why is the full $5000 of the state refund considered "

state refiund is taxable only up to the amount of state tax that was applicable in schedule A, in other words, taken.

For example, if your property tax listed was over $10,000, then none of your state tax was taken.

Review the worksheet for this calculation.

[JamesVDale]

Thanks for the reply.  I didn't fully understand your response however, especially the "... not relevant for purposes of state ..."  What is not relevant?  I've looked at the State refund WS and changed the numbers in TT to see how the taxable portion of the state refund changes.

I could make the example simpler to remove SALT and say "I owed $8000 in taxes in 2023 (i.e. all was deducted in 2023)".  If I got a state refund of $1000 the federal form would say "Well, you actually should have only claimed $7000 and so you are going to have to pay some taxes on that $1000 refund since you claimed more than you should have in 2023.  And so if I enter all $5000 of the refund I would be taxed even more!  

I think I should remove the amount of those state tax credits from the amount I enter on the federal as state refund, but I cant find anything that even discusses this and hence I'm turning to the experts here.

Thanks fanfare.

Regards, James