Is it better to take the itemized deduction if I have a bigger state tax refund this year?

[jww5]

Hi All:

I am finishing up my taxes for the 2021 year and noticed that my itemized deductions total around $27,800.  That is just a little more than the standard deduction for married filing jointly of $25,100.  As it was, a portion of my charitable contributions for 2021 was not deductible on the federal return as the itemized deductions was below the standard deduction.  My state tax refund from 2020 was $7259.  My state tax refund this year will be larger, around $9,250.

So in terms of tax planning for 2022...  For the state tax refund I am expecting this year to be nontaxable... How does taxation for the state tax refund work?  Does the itemized deductions need to be used the year the state tax refund is claimed (ie, this year for the 2021 taxes)  or next year when the notice is received (for the 2022 taxes)?

Because if I am so close to the standard deduction, I might consider giving up the $2,800 of deductible charitable contribution and choose the standard deduction for this year so that the $9250 of state tax refund that I am getting this year (for 2021 return) would not be taxable on next year's (2022) return.  If the law says that I need to use the standard deduction next year (the 2022 return) instead, I could do that. 

I am expecting even less of itemized deduction next year as I have paid back some of the mortgage, and I will defer my charitable contributions to 2023 to bunch them.

Does this makes sense?  Let me know if I am on the right track.  Thank you for taking the time to help.

[DoninGA]

If you are seeing $27,800 on Line 12a of the Form 1040 that is the Standard Deduction for Married Filing Jointly and both of you are age 65 or older.

Standard deductions for 2021

• Single - $12,550 add $1,700 if age 65 or older
• Married Filing Separately - $12,550 add $1,350 if age 65 or older
• Married Filing Jointly - $25,100 add $1,350 for each spouse age 65 or older
• Head of Household - $18,800 add $1,700 if age 65 or older

[fanfare]

@jww5 

the first thing to do is try Schedule A with the Sales Tax option instead of state income tax.

Due to SALT you may come out with 10,000 either way.

In that case, you are not using state income tax so your state refund cannot be taxed.

[ThomasM125]

If you claim the itemized deductions in 2021, you would need to add your state tax to your 2022 income to the extent you deducted it in 2021. You need to keep in mind that you can only deduct $10,000 of state taxes as itemized deductions, so it is possible that you are not using the whole state income tax paid in 2021, as you also may have property taxes deducted that put you over the $10,000 of total allowed deduction.

If it turns out that you are deducting the full $9,250 of income tax this year only to have to pay it back next year, but your itemized deductions are over the standard deduction by $2,700, then you will be better off not itemizing as you will be giving up $6,550 worth of deductions over the two years.