My real estate taxes already exceeds the cap $10000, does it matter if I include state income tax or sales tax?

[TJ109]

In schedule A, section 2 Taxes you Paid, the max deduction is 10,000. but my real estate taxes is 11,000, so including state income tax or sales tax doesn't change anything of this year's tax return, but does it impact next year's tax return? If I choose to deduct real estate taxes + state income tax, will the state refund be taxable for my next year tax return?

[JillS56]

First, TurboTax automatically calculates the state income number from the income on the W-2 documents entered.  They are going to be included regardless but the total for the State and Local Taxes are limited to $10,000.   As far as next year's return, what you enter here does not impact next year's taxes. The only impact they will have on next year's taxes is if you are able to itemize.  If you are able to itemize, then next year the state refund related to the state income tax will be considered income.   

The state refund is only taxable if you are able to itemize this year. State refunds are partially taxable if you itemized your deductions last year exceeded your standard deduction by less than the amount of the refund.   If you take the standard deduction, then the state refund is not taxable.  

[TJ109]

Thank you @JillS56 

I choose itemize this year. In my case, state income tax doesn't contribute any deduction, why the refund is taxable in next year?

another option is that I can choose to deduct general sales tax instead of state income tax, right? but I don't want to spend the time to calculate general sales tax I paid in 2021. can I just estimate a very small amount, say $200? Because whatever the number is, it doesn't help any deduction.

[Mike9241 · Accepted solution]

no it doesn't because your real estate tax deduction already exceeds the $10,000 limit. you get no benefit from the additional state income taxes. the state tax refund is only taxable if it produced a tax deduction for 2021.

this is from IRS PUB 525 the worksheet on page 26. the wording has been adjusted to reflect a 2021 return 

To determine amounts to enter on lines 1a and 1b of Worksheet 2, complete the following:
1. Enter the income tax refund from Form(s) 1099–G (or similar statement) . . . . . . . . . . . . . . . . . . . . . . .
2. Enter the refunds received for state and local real estate taxes and state and local personal
property taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3. Total state and local refunds. Add lines 1 and 2. But don’t enter more than the amount of your state
and local taxes shown on your 2021 Schedule A, line 5d . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4. Is the amount of taxes paid in 2021 (generally Schedule A, line 5d), more than the amount on your 2021 Schedule A, line 5e?.................................................................
No. Enter the amount from line 3 on line 4 and go to line 5.  .....................................
Yes. Subtract the amount on your 2021 Schedule A, line 5e, from the amount of state and local
income taxes reported on your 2021 Schedule A, line 5d. Enter the result ...................................
5. Is the amount on line 3 more than the amount on line 4?
No. [STOP] None of the refunds on lines 1 or 2 are taxable.
Yes. Subtract line 4 from line 3 and enter the result here . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.
6. Add lines 1 and 2 and enter the result here . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.
7. Divide line 1 by line 6. Then multiply by the amount on line 5 and enter the result here and on
Worksheet 2, line 1a . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.
8. Divide line 2 by line 6. Then multiply by the amount on line 5 and enter the result here and on
Worksheet 2, line 1b . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.