10k limit on Schedule A, line 5e

[othersider2]

Schedule A, line 5e only lets you deduct up to 10,000, even if you are over 10,000.  So for the sake of argument, let's say in 2021 I withhold 11k in state taxes and my actual tax is only 9k, so I get a 2k refund.  On Schedule A, I can only deduct 10k of the 11k, so I lose 1k of deductions.  But on 2022 1040 Schedule 1, I have to report a refund of 2k, even though in 2021, I was only able to deduct 1k of that 2k.  This seems unfair and like I am getting penalized for withholding too much.  Is there a remedy for this?

[DoninGA]

1.  Unless the total of All your itemized deductions in 2021 are greater than the standard deduction for your filing status then the deduction for state taxes withheld on Schedule A is not relevant.

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

2.  If you did not itemize your deductions in 2020 then the 2020 state tax refund is not entered as income on your 2021 federal tax return

3.  Adjust your state tax withholding on your wages so that you will receive little or no state tax refund for tax year 2022

[Mike9241]

see PUB 525 worksheets 2 and 2a for computation of taxable portion. 

https://www.irs.gov/pub/irs-pdf/p525.pdf 

[Critter-3 · Accepted solution]

This seems unfair and like I am getting penalized for withholding too much.  Is there a remedy for this?

You are correct ... it is not fair which is why it doesn't happen ... only the amount of the state refund that you got a tax benefit from is taxable.  The program will do the calculations in the aforementioned publication worksheet automatically if you enter the information required.  

[othersider2]

Great to hear!!!  So you are saying I will be credited for the amount that could not be deducted due to the 10k limit?  

[Critter-3]

Yes. 

[fanfare]

You don't get taxed on any  state refund of amount you did not itemize (deduct) the prior year.

if your property tax is over 10,000, there's no way to deduct state income taxes.

[othersider2]

OK so in 2020, I over withheld my state income tax. My withheld amount was around 9K ( my actual tax was 6k). That 9k plus my personal property taxes took me to about 11 K that I reported on line 5 schedule a.  That exceeded the 10 K limit, so what will TurboTax do for tax year 2021 to offset the 1K but I was not able to deduct?

[Critter-3]

Ok ... on the 2021 return if you had a refund of the state income taxes of say $11K only $10K less the PP taxes claimed  will be taxable ... see the worksheet in the other post if you want to see how the calculation is handled.  

[othersider2]

Excellent.  Thanks so much for the help!

[fanfare]

Worksheet says:

"A recovery is included in income only to the extent of the deduction amount that reduced your tax in the prior year (year of the deduction)."

This is another way of stating what I said (or tried to say) above.