It's a basic premise of the tax law providing that if you deduct an amount you paid in one year, and then later recover all or a portion of that payment, well...it stands to reason that you should have to include that recovery in income. The purpose of the tax benefit rule is this: as you know, tax calculations are done on an annual basis. Despite this fact, a taxpayer who deducts an amount and recovers some or all of that payment in a future year should beMakes sense.
And while the Tax Cuts and Jobs Act changed the way we view state and local income tax refunds, it certainly didn't eliminate the need for thoughtful consideration. While AMT may no longer be much of an issue -- the exemption was increased to a large enough amount that most taxpayers won't be subject to AMT's grasp -- two changes emerging from the recent round of tax reform certainly will impact our Section 111 analysis.
Section 164 doesn't provide any ordering rule, and the Form 1040 would simply show $10,000 of each payment, without reflecting which deduction was ultimately used up to the $10,000 cap. Thus, in order to understand the proper treatment of any state and local income tax refund in 2019, we're going to need some guidance.
The Thus, A is required to include the entire $1,500 state income tax refund in A’s gross income in 2019.: Taxpayer B paid local real property taxes of $5,000 and state income taxes of $7,000 in 2018. Section 164 limited B’s SALT deduction on B’s 2018 federal income tax return to $10,000, so B could not deduct $2,000 of the $12,000 state and local taxes paid. Including other allowable itemized deductions, B claimed a total of $15,000 in itemized deductions on B’s 2018 federal income tax return.
As opposed to what? Halfing them?