RetiredinMich
Returning Member

A different State Tax Refund Recovery Exclusion Error

I have a 1099-G from the state for approximately 1/3 of my January 2021 estimated tax payment. I am a cash basis taxpayer so none of these amounts were reflected in my 2020 itemized deductions. When I enter the 1099-G, TT says "lets see if any of this amount is taxable. I have reentered the data 3 times so I am confident I am answering all the questions correctly. TT determines that almost 1/2 of the refund is taxable. The fact pattern is different, but TT seems to be making the same logic error sweetwine_man reported last April 2021. 

IRS Pub. 525 (pg.23) offers clear guidance in both these cases: "Recoveries ... Tax benefit rule. You must include a recovery in your income in the year you receive it up to the amount by which the deduction or credit you took for the recovered amount reduced your tax in the earlier year."

Since the recovery had no effect on the prior year's tax, I assume I can obtain the correct tax result by deleting the 1099-G. That may trigger an audit flag and it sure won't fix the issue for other users.

Anyone have thoughts on this situation?