State tax filing

This is a long response...bear with me.

I absolutely love the logic-based approach. How will the IRS computer approach your return? However, I applied the same logic and came up with a different answer. Turbotax doesn't allow reporting 2024 1099-G with Box 2. This leads me to think the IRS computer won't know how to compute the state 1099-G for 2024, and the computer will simply disregard this form as not computable. In all of the IRS instructions I've read, none of the instructions entertain receiving a state tax credit for the current filing year, rather than a prior year. In other words, I believe Oklahoma is effectively "breaking" the IRS expectations for what is possible, and it's hard (maybe impossible) to know what the computer will do with the resulting paradox. I'm curious if there is evidence as to which direction the IRS computer will jump, or are we simply sharing our "pooled ignorance"? 

However, while working through the ramifications of this, I spent some time with the IRS instructions more carefully (not just Turbotax instructions). Here is new information that I don't think other responses have addressed:

Instructions for Schedule 1, line 1 read "See Itemized Deduction Recoveries in Pub. 525 instead of using the State and Local Income Tax Refund Worksheet in these instructions if any of the following applies. 1. You received a refund in 2024 that is for a tax year other than 2023." Since this is a true statement (the refund is listed as tax year 2024), I went to Pub 525. Alternatively, go to Pub. 525 if any other rules apply, such as "Your 2023 state and local income tax refund is more than your 2023 state and local income tax deduction minus the amount you could have deducted as your 2023 state and local general sales taxes." Since the PCTC credit exceeded my SALT deduction, this statement also directs me to Pub. 525.

So, in Pub 525:

The amount of the tax credit on 1099-G that is actually reportable as income has several limitations:

1) Standard Deduction Limit: the taxable amount can't be more than the difference between itemizing and taking the standard deduction. (this saves you from redoing past year taxes to just take the standard deduction).

2) Recovery limited to deduction: the taxable amount can't be more than the amount of state tax that was formerly deducted from income. (you only received a benefit to the extent you deducted state income tax. So, that's the maximum you have to add back).

3) there are other specialized cases as well that I won't bother to list in full.

So, worst case scenario: for folks who itemize, the max taxation is still limited by Pub. 525.

But again, the paradox: If you are attempting to apply these directions literally, you get stuck. Working through the Pub. 525 worksheet 2 (Recoveries of Itemized Deductions): It's impossible to know what your itemized deductions for 2024 are as of yet, because you're still working on those taxes! If you simply decide to treat this as a 2023 number, there will be a mismatch with the IRS computer, which DOES have a 1099-G value for 2023. Won't the IRS reject this?

So, a conservative approach would be to report PCTC as taxable income, but I would think you can still apply the applicable limitations. For me, I'm limited to the amount of state tax I previously deducted. The less conservative approach would be to just ignore the form for another year, when it will be easy to report the income.