The key point is - Line 5a was populated with the amount of withholding and estimated taxes actually PAID in 2020. The January 2021 Estimated Tax Payments were not paid in 2020, so WERE NEVER DEDUCTED, hence the refund of a portion of payments never deducted should not be included in income. Again quoting from Publication 525: "If the refund or other recovery and the expense occur in the same year, the recovery reduces the deduction or credit and isn't reported as income." While the answers to the Turbo Tax questions seem to clearly spell out this situation; the software seems to use the logic that half the total tax was paid in 2020 and half the tax was paid in 2021, therefore half the refund should be allocated to the payments deducted in 2020 and be included in 2021 income as a recovery of the deductions THAT WERE NEVER TAKEN.
I tried to follow the IRS instructions for Schedule A, which pointed to Schedule 1 instructions, which then pointed to Publication 525 if an exception applied. In this case Exception 5 in the Schedule 1 instructions applies: "You made your last payment of 2020 estimated state or local income tax in 2021." As a cash basis taxpayer, the recovery and the expense occurred in the same year (2021) and per Publication 525 should not be reported as income. The IRS instructions seem straight forward and logical to me and clearly at variance with the Turbo Tax calculations.
