Federal State/Local Sales Tax itemized deduction option and Colorado Tabor Sales Tax Refund

[ksunberg]

• In my Tax Year 2023 Federal return I itemized deductions and used the State/Local Sales Tax deduction option because of a couple large purchases made in 2023. In my Tax Year 2023 Colorado State return I received a $940 refund ($1600 MFJ Tabor Sales Tax Refund - $660 remaining Income Tax obligation), paid in 2024. I did not receive a 1099-G from Colorado.
• There is a long standing **precedent** for treating the Colorado Tabor refunds as non-taxable. If I had used the State/Local **Income** Tax deduction option for Tax Year 2023 I would not even think about accounting for the Tabor refund in my Tax Year 2024 return. However, as I read the "Recoveries" section of Publication 525, it seems to me that I need to report/include the $1600 Sales Tax refund in my Tax Year 2024 Federal return for consideration of taxability (subject to the limits documented in Publication 525) **because** I used the Sales Tax deduction option for Tax Year 2023. Am I right about that?

[AmyC]

No. TABOR is considered a state tax refund but according to Victory for Coloradans! TABOR Refunds Will Not Be Taxed by the IRS.

Your logic is sound but it looks like you can just enjoy your refund. If is was taxable, it would only be the portion related to your state deduction. Since you had such high sales tax, it may not have mattered anyway.

[ksunberg]

Thanks for your response ... but ... Hmmm 😊, I asked the same question in REDDIT r/tax and the answer I received was Yes.  You're right that in the case of a "Yes" answer the refund would apply only to the extent that you had claimed a State Sales Tax deduction but Yes is Yes.  With the Social Security and spousal retirement account income exclusions, the Federal Sales Tax deduction option seems to be a competitive option.  I wonder if there are others who will vote/weigh in?