Is my 2021 Arizona state refund taxable this year given that I donated and received tax credits?

[andr3wloo]

My research shows that I am subject to federal income taxes on my 2021 AZ state refund (received in 2022).  This is because
1) I itemize my federal taxes in 2021
2) I received a 2021 state refund during 2022
https://blog.turbotax.intuit.com/tax-tips/is-my-state-tax-refund-taxable-and-why-90/

Strategically, this seems odd to me because I received donation tax credits that boosted my state refund 1 for 1

i.e...donate $600, and receive $600 in tax credits. 

https://phoenixchildrensfoundation.org/updated-arizona-charitable-tax-credit-guide/

If I received $600 in tax credits for the 2021 year, now I'm counting that $600 as "income" during the 2022 year, which gets taxed at my ordinary tax rate...suddenly it's roughly $150 of unexpected taxes this year. 


All in all, I've donated over $2000 in 2021 because it provided a 1:1 credit boost, but seems like I just ended up paying the price in 2022.

Any Arizonians in the room with the same/similar issue?
From a tax strategy perspective, am I missing the picture?

[MinhT1]

Yes, your state tax refund received in 2022 is taxable at the Federal level if you itemized deductions and deducted state tax in 2021.

From a tax perspective, for the donation credit in Arizona, you still have a tax benefit. as an example, if you donate $2,000 in 2021, your state tax refund is increased by $2,000. In 2022, you are taxed on your Federal return on the extra $2,000. Suppose your tax bracket is 24%, you will pay $480 in tax, leaving you a tax benefit of $1,520.

[a2j4life-tj]

As far as refunds being counted as taxable income I believe that has long been the case.  I think the idea behind it is that since the money is returned to us we must act as though it was always a part of that taxable years income.

I mostly want to address the Arizona issue though - there does appear to be a problem with how the Turbo tax forms are being filled in for those who make donations for the AZ dollar for dollar tax credit.  Please see a fellow AZ post entitled

Turbo-tax can't handle SALT Safe Harbor + Arizona tax credits. Please fix for next year.

:

https://ttlc.intuit.com/community/tax-credits-deductions/discussion/turbotax-can-t-handle-salt-safe-...