The ANCHOR payment that you received in October 2023 was a refund of part of your 2020 real estate tax.
If you did not claim an itemized deduction for real estate tax on your 2020 federal tax return, or you took the standard deduction, then you just ignore the ANCHOR payment. You do not enter it anywhere, on either your federal or state tax return for 2023. It does not affect your 2023 federal or state income tax.
If you did claim an itemized deduction for real estate tax on your 2020 federal tax return (on Schedule A line 5b), then the ANCHOR payment is a refund of part of the real estate tax that you deducted in 2020. It's called an "itemized deduction recovery." You might have to report part or all of the payment as taxable income on your 2023 federal tax return. You report only the amount that actually reduced your tax in the earlier year. The calculation of the amount is complicated, and TurboTax will not do it for you. You have to do the calculation yourself outside of TurboTax, and enter in TurboTax the taxable amount that you calculated. You will need a copy of your 2020 tax return. For a couple of simpler options, see below.
The rules for calculating the taxable amount that you have to report are in IRS Publication 525, pages 25 - 29, beginning with "Itemized Deduction Recoveries" in the middle of page 25. (Page numbers are for the 2023 edition.) It's possible that the result of the calculation will be that none of the ANCHOR payment is taxable. If that happens, you are in the same position as if you did not claim the itemized deduction in 2020. You do not enter the ANCHOR payment anywhere.
If the calculation does result in a taxable amount that you have to report as income, here's how to enter it in TurboTax.
- Go to Federal Taxes > Wages & Income. On the 2023 Income Summary screen, scroll all the way down to the last section, Less Common Income, and click the Start or Update button for the last topic, "Miscellaneous Income, 1099-A, 1099-C."
- On the Miscellaneous Income screen click the Start or Update button for "Reimbursed deductions from a prior year."
- On the Reimbursed Deductions screen check the box that says "Refunded Taxes deducted as an itemized deduction in previous year" and click Continue.
- On the next screen enter the taxable amount that you calculated, select Real Estate Tax for the type of tax refunded, and enter NJ as the state.
The taxable amount will be reported on Schedule 1 line 8z on your federal tax return. It will not appear on your New Jersey tax return. It is not taxable in New Jersey.
There are two simpler options that avoid having to calculate the taxable amount of the recovery as described in Pub. 525. Both of these options assume that the entire ANCHOR amount gave you a tax benefit in 2020, so they could result in paying more income tax than necessary for 2023.
One option is to just report the full amount of the ANCHOR payment as taxable income, without bothering to do the calculations to figure out how much of it actually has to be reported as income. Follow the steps above for entering it, and enter the full amount. The IRS will not complain if you do this, but you could be paying more income tax than necessary.
The other simple option is to deduct the refund from the property tax that you paid when you figure your real estate tax deduction for 2023. This is technically not correct, and could also result in paying more income tax than necessary, but the IRS is not likely to complain. If you do this, when you get to the Property Tax Deduction or Credit in your New Jersey tax return, enter the full amount of property tax that you paid. Do not subtract the ANCHOR payment on the New Jersey tax return.
