@NCperson sorry, but you have it wrong.
Money received in 2018 might or might not be taxable income in 2018 -- that's the cash basis rule. But in the case of a reimbursed deduction, you have to look at the tax benefit rule. This says that for a previous deduction that is reimbursed or recovered, the taxable amount depends on the tax benefit that originally obtained from the deduction.
Some examples.
1. If you receive a state tax refund in 2018, but used the standard deduction in 2017, then the refund is not taxable income in 2018, because you got no tax benefit from claiming a deduction in 2017. It doesn't matter whether or not you are itemizing in 2018, it depends on whether you originally got a tax benefit from the deduction.
2. A few years ago, there was a class action settlement between mortgage lenders and the US govt over excess interest charged to active duty service members in violation of a particular law designed to protect service persons from losing their homes. The service persons received interest rebates. Whether that income is taxable in the year the rebate was paid, requires analyzing all the past tax returns for the years covered by the rebate, to determine, for each particular year, did the taxpayer deduct their interest and if so, did it lower their income taxes. Depending on the particular taxpayer, the interest rebate might have been fully, partly, or not at all taxable income.
3. Suppose I paid $4000 in state withholding in 2017 and claimed it as an itemized deduction. My total itemized deductions were $7,000. I get a $1000 state refund in 2018. Only $600 of the refund is taxable. That's because, if I had only tried to deduct $3000 of state income tax, my itemized deductions would be $6000 but the standard deduction was $6400. So the tax benefit in 2017 of the now-refunded money was $600, so $600 is taxable in 2018.
There can be many other examples. A vendor who gives a rebate in 2018 to a schedule C sole prop for materials purchased in 2017. Property tax refunds. A charity returns a donation for some reason.
See this IRS document for how the tax benefit rule might apply to 2019 tax returns where there is a refund of state tax after the imposition of the $10,000 cap. The tax benefit rule is not new, although these particular scenarios are new. https://www.irs.gov/pub/irs-drop/rr-19-11.pdf
In this particular case, the refund is not a refund of an amount deducted on the 2017 return, it is a refund of an amount paid a few months earlier in 2018. So it does not represent a refund of a tax benefit from the 2017 return. Instead, it reduces the net amount of state income tax that can be listed as a deduction on the 2018 return, assuming the taxpayer itemizes their deductions in 2018.
