I'm a PA resident currently on active duty in Florida and every year until now I've paid monthly PA state taxes knowing I'll get them fully refunded come tax season. Every year previously I took the standard deduction and never had any issues with it.
This year, due to buying a house last year in Florida, it was recommended to me by Turbotax to itemize my deductions (because of increased deductions from property taxes and mortgage payment interest). However, on the page that recommends claiming itemizing deductions, it tells me that the state taxes I paid during the year also count as a tax deduction. However this doesn't seem right to me since I know I'll be getting those state taxes fully refunded by PA. Am I correct in assuming this? And if so, how do I go about fixing that? Do I just tell it under W2 information that I didn't pay any state taxes last year?
This is a situation where calendar years and tax years cross.
Yes, you will claim State Tax Paid (in 2021) on your Tax Year 2021 Federal return.
If you get a State Refund for tax Year 2021, that will be received in 2022, so it might be taxable income next year on your 2022 Federal Return.
If you select to use State Sales Tax in place of State Income Tax, the refund you get in 2022 will not be taxable.
If you select to use State Income Tax rather than Sales Tax, the refund you get in 2022 MAY BE taxable.
When you use the State Income Tax on Schedule A, and get a refund, the refund amount attributable to the state income tax is taxable income. (it is a bit complicated which is why TurboTax asks if you received a State refund, and if yes, it asks what you claimed on the previous year's Schedule A for Sale's tax OR Income tax.)