topic Re: Should I file standard deduction vs Itemized if only $300 difference while I have huge state tax refund this year? to avoid refund on state tax as income next year ? in Deductions & credits

Should I file standard deduction vs Itemized if only $300 difference while I have huge state tax refund this year? to avoid refund on state tax as income next year ?

shwetashah16 — Tue, 09 Mar 2021 23:12:39 GMT

Re: Should I file standard deduction vs Itemized if only $300 difference while I have huge state tax refund this year? to avoid refund on state tax as income next year ?

rjs — Tue, 09 Mar 2021 23:37:40 GMT

You should use the itemized deductions if they are more than your standard deduction.

Your "huge" state tax refund will almost certainly not all be taxable next year. The calculation of how much of the refund is taxable is complicated and hard to explain. It takes into consideration the fact that you could have taken the standard deduction. It also takes into consideration the $10,000 cap on the deduction for state and local taxes. The basic principle is that the amount that will be taxable next year is only the amount for which you actually get a tax benefit this year. The bottom line is that you won't lose anything by taking the itemized deductions this year. At worst, it will end up the same, but you'll pay the additional tax next year instead of this year.

Re: Should I file standard deduction vs Itemized if only $300 difference while I have huge state tax refund this year? to avoid refund on state tax as income next year ?

shwetashah16 — Tue, 09 Mar 2021 23:50:25 GMT

Thank you for your response.

So say if I am getting 5k as State tax refund and my Effective tax rate is around 10% - doesn't that mean I need to pay around $500 (roughly depending on other deductions) more on my next year tax? While if I claim standard deduction this year I get $300 less refund on federal but my state tax return of 5k is tax free?

Re: Should I file standard deduction vs Itemized if only $300 difference while I have huge state tax refund this year? to avoid refund on state tax as income next year ?

rjs — Wed, 10 Mar 2021 00:02:42 GMT

No, it doesn't mean that. You will not pay $500 more next year because not all of the $5,000 refund will be taxable. You will only pay tax on part of it. At most you will pay the $300 that would have been taken out of your refund this year, but you will pay it next year instead of this year. Depending on your other deductions, you might pay less than $300. It's even possible that none of the refund will be taxable, in which case you will not pay any extra tax at all next year.