30 Mar Are state tax refunds taxed again on my federal return?
Q. Are New Jersey state tax refunds received this year from overpayment of estimated taxes taxable on this year’s federal return?
A. Here’s what you need to know.
The IRS has what’s called the Tax Benefit Rule.
This rule states that if you take a deduction for state income taxes or real estate taxes in one year and get a refund of part or all the payments in the next year, you must include the refund as income on the next year’s tax return if there was a tax benefit to the deduction, said Bernie Kiely, a certified financial planner and certified public accountant with Kiely Capital Management in Morristown.
“Assume you included income taxes or real estate taxes on Schedule A, but then you took the standard deduction because it was greater than your list of itemized deductions,” he said. “Since you took the standard deduction there was no tax savings from state income or real estate tax deduction.”
You didn’t benefit from the deduction, he said, so you do not have to include the refund or rebate in the subsequent year’s tax return.
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This story was originally published on March 30, 2022.
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