Does my Michigan refund for 2018 while I worked there, but lived in Illinois count as additional federal income for 2019 taxes even though I owed the amount to Illinois?

[jeffborden7]

I kept my residence and family in Illinois for 2018, but worked in Michigan. I owed no state tax to Michigan because of an agreement with Illinois. But I owed the entire amount (plus a little) to Illinois, so I infact did not get to keep my "refund". But that option does not seem to be a part of the turbo tax questions. Does that refund count as federal income, because I did not get to keep it. Thanks

[DanielV01 · Accepted solution]

Unfortunately, it can count as income if you itemized last year.  If you itemized your tax deductions last year and included the Michigan taxes withheld as part of your itemized deductions, then the refund can be taxable.  Since you paid Illinois tax against it, the tax you paid back would be counted as additional state taxes paid in.  

The Tax Cuts and Jobs Act makes this a rather unfortunate exchange, however.  The refund is included in income, but the extra tax may not (and probably does not) lower your taxable income because:

1. The standard deduction is so much higher this year, and
2. The State and Local tax Deduction (SALT) is capped at $10,000 (and includes real estate taxes as well).  

In years past, the refund being claimed as income would have been subtracted right back out by paying back to the other state.  But this year, because of the change in the law, it does not work out that way.