Normally I agree with @Hal_Al but not this time ...
If your 2021 state tax return shows a refund and you choose to apply that refund to your 2022 estimated taxes, that amount is considered paid in 2021, for purposes of getting the SALT deduction, on your federal return. If you apply your 2021 refund to the 2022 estimates it is considered paid in 2022 (since you file the 2021 return in 2022) and is added to the 2022 Sch A as taxes paid in 2022. This is treated the same as if you made the 2022 estimated payment on 4/15/23 with the state refund you got in your hand instead of applying it forward. Taxes applied are always considered as paid on the first quarter even if you file your return late in the tax year which makes this a benefit for avoiding underpayment penalties.
Q. Specifically, is the SALT amount based solely on taxes actually paid (not "owed") rather than involving the refund?
A. Yes. You get to deduct the amount paid in 2021. But if you actually receive a refund, you have to treat that refund as taxable income. If you, instead, apply the refund to your 2022 taxes, you keep your deduction and do not have to pay tax on the "refund". The 2021 refund is considered recived in 2022 even if it is applied to the 2022 estimated payments. On the 2022 return the refund is considered taxable income even if you applied to the next tax year. Then on the 2022 Sch A the amount of taxes you paid in 2022 is entered and will include the amount you applied from the 2021 refund. Again this is no different than if you had recieved the refund in your hand and turned around and paid it to the state. Having the amount applied just skips the hassle of getting the refund and making the payment.
Q. Or is it a big mistake to defer a big refund?
A. No. For most people, that is the best stategy. Since the SALT deduction is limited to the $10K applying an amount in excess of that is up to you ... any state refund you get is limited to the same $10K for being taxable. For instance if you pay in $15K in state taxes you would only get to deduct $10K on the Sch A and the 1099-G showing the $15K refund only $10K would be taxable.
One more point ... this can be confusing to some.
State taxes you pay during the year includes any withholdings + estimated payments + amounts applied from last tax year for that tax year. However the estimates paid during the in January are FOR the prior tax year since the 4th payment is due the next tax year... although some pay it during the same tax year it will be applied on to avoid the confusion. Taxes paid for the tax year are entered on that tax year's form 1040.
BUT on the Sch A things are different ... only taxes actually paid during the tax year are counted. SO the January payment for the 2021 last year's fourth quarter + the 3 quarters in the current 2022 tax year are counted on the 2022 return.
Note the differences ...
Payments made IN 2022 that go on the 2022 Sch A = 1700 + any payments of prior year state taxes owed
2021 Q4 Jan payment (for 2021) $200
2022 Q1 April payment $500 (includes any 2021 refund applied)
2022 Q2 June payment $500
2022 Q3 Sept payment $500
2022 estimated Payments made FOR 2022 that go on the 2022 1040 = $2300 + any payments of prior year state taxes owed
2022 Q1 April payment $500 (includes any 2021 refund applied)
2022 Q2 June payment $500
2022 Q3 Sept payment $500
2022 Q4 Jan payment (paid in 2023) $800
