@alex7003 wrote:
Thanks. For state it may be the case. For federal it does not seems right. I am not getting any tax credit for 2022 because of $10k limit on property taxes and I am well over $10k.
I believe you deduct all the property taxes you actually paid in 2022 on your 2022 return. Then in 2023, you would report the check as taxable income as a "taxable recovery", because it is a reimbursement of a previously deductible item. (If the check was received in 2022, the same year the taxes were paid, you would net it out as described.)
Further, you use the tax benefit rule when computing whether the refund is taxable income or not in 2023. For example, suppose your combined SALT taxes are $15,000, and the refund is $2000. That means that even if you had paid the lower taxes in 2022, you would not have received a benefit from the deduction. Since you received no benefit, the rebate is not taxable in 2023.
(As a counter example, suppose your combined SALT taxes were $11,000 and the rebate was $2000. Your taxes would have been $9000, so the excess tax created a $1000 tax deduction, meaning that in 2023, $1000 of the refund would be taxable income.)
(The tax benefit rule is the same rule used to determine if a state tax refund is federal taxable income. For example, I will claim $8000 in SALT on my 2022 return, of which $5000 is state income tax withholding, and I expect to receive a $500 refund. That means my taxes really were only $4500. Since I received a deduction benefit by claiming all $5000 withholding as a deduction, the $500 refund will be taxable income next year. In your case, if you paid let's say $8000 in state income tax, but couldn't take any deduction because your property taxes were more than $10,000, then you received no benefit from deducting your state income tax, and if you get a state tax refund in 2023, it won't be taxable income to you. The effect of the property tax refund is calculated on the same principles.)
