I would argue that this it not a state tax refund, it's a tax credit.
It isn't based on state tax paid in any year, it's based on the Adjusted Gross Income of the Federal 1040 filed for two years prior. The credit has two amounts depending on the AGI. This is not a tax since the amount is not directly related to the amount of income.
The 2024 credit is based on the AGI of the Taxpayer's 2022 Federal Return. It is not based on the state tax paid.
The dollar amount is sent to the school, not the Taxpayer.
I personally do not think the credit is taxable on a federal return based on:
According to the Tax Adviser:
", the IRS explained that the original recipient of the state tax credit “is not viewed as having received property in a transaction that results in the realization of gross income.”
According to the State of Oklahoma:
"for the tax year 2024 and subsequent tax years, if an Oklahoma taxpayer incurs or will incur a qualified expense on behalf of an eligible student during the tax year, the taxpayer may be eligible to claim the private school tax credit."
According to The Honorable Richard L. Hanna U.S. House of Representatives
“Generally, a state income tax credit is treated for federal income tax purposes as a reduction or potential reduction in the original recipient's state tax liability to the extent that the taxpayer can only apply the credit against a current or future tax liability. Consequently, an original recipient of a state income tax credit is not generally treated as having an accession to wealth that results in gross income under section 61. Additionally, when an original recipient of a state income tax credit applies the credit to reduce a state tax liability, the taxpayer has a lower deduction for state tax under section 164 of the Code.”
If anything, I might see this as reducing (or eliminating) the deductibility of state school tax paid on the 2024 federal return.
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