Itemizing Deductions - How to treat state refund if I hit 10k limit with just property taxes?

[ssf-gm]

Hello,

If I itemize deductions and receive a state refund, it looks like next year, I will have to include that in my income. I.e. lowering the benefit of itemizing deductions by the amount of the state refund effectively. To confirm, do I still need to include state refund in my income if I hit the 10k SALT limit on the deduction just via property taxes? I am not including state income taxes paid in the 10k deduction, only property taxes.

Thanks for any insight!

[xmasbaby0]

Yes you will still have to include your state refund as income next year even if you hit the SALT limit.  Do not confuse deducting state tax you paid with receiving income from the state.

[AmeliesUncle]

No, your refund will not be added to your income next year.  It is only added to the extent that it reduces your taxable income (which in your case, it is not reducing it at all).

[ssf-gm]

When would this ever be the case? If refund is added to my income, it will never reduce my taxable income, right?

[AmeliesUncle]

Sorry, I may have phrased things poorly.  The state refund is only taxable to the extent that the deduction in the prior year reduced your taxable income.

[SteamTrain]

I "think" it works like this  (someone correct me if I'm "off" a bit)

IF you had state Income taxes and property taxes of 12,000 declared on your 2021 Federal tax return.

It was limited to 10,000...thus a $2000 excess not used.

IF you then received a $3600 refund during 2022 for 2021 state taxes.

You would enter the full $3600 as a state refund on your 2022 tax return, but then the $2000 not able to be used the prior year is subtracted from that amount, and only 1600 of the state refund ends up being included as Federal taxable income. 

Thus you make sure you include everything possible as your deduction amounts in one year, and as long as you consistently transfer the TTX file from one year to the next, the tax software keeps track of those numbers.  The main issue one has to keep an eye on is if the state changes the refund for some reason, then the refund amount might need to be corrected when you go thru the state refund section the next year.

[SteamTrain]

Of course, this all assumes that your other "itemized" deductions take you over your 2021 Standard Deduction.  Getting there for a single person is easier with 10k already in the works, but a married couple has another $15,100 to find.

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 What's my standard deduction for 2021? (intuit.com)

[ssf-gm]

Thank you, very interesting.

So to make sure I understand correctly, let's assume I deduct 10k off my property taxes, but also pay 10k in state income taxes. If I then get a 5k state tax refund, the 5k is not taxable income? Since it is still below the extra state income taxes I was unable to deduct above the cap of 10k?

[SteamTrain · Accepted solution]

No, not quite  (or maybe I don't see what you are saying).

...the property taxes and the state income taxes paid "together" are limited to 10k.  Not one or the other.

You don't apply just your property taxes to the 10k limit....the Property tax + state income taxes paid total has the 10k limit.   

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(But for a typical example situation, don't say 10k for both...it gets confusing)

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Situation: 

8k of state income taxes paid, and 9k of property taxes.

...total =17k, but limited to 10k irrespective of the source.

Since 7k of the "total" was not used for 2021, then a 5k state refund from the 2021 state tax return would be less than that 7k amount....and none of the 5k refund would become Federal income for 2022 taxes.

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