What happens with ANCHOR on my federal tax return?

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Q. How will the state ANCHOR payments be handled for federal tax purposes, especially since in 2023 we have two payments from two separate applications.
— Taxpayer

A. This is one that many taxpayers have been wondering.

You want to get your tax filings right, of course.

A refund of real estate taxes is based on the IRS’ tax benefit rule, said Ken Bagner, a certified public accountant with CLA in Livingston.

“The tax benefits rule states if a tax deduction is taken by a taxpayer in a prior year and the underlying amount is recovered in a subsequent year, then the refund must be included in the year received,” Bagner said.

So, for example, if you were able to deduct real estate taxes in a prior year on your federal return because you itemize deductions, then you would have to recapture the income, he said.

If you do not itemize deductions there would be no recapture, he said.

“If you do itemize, taxes are limited to a $10,000 deduction under the law, so there is a case to be made that most of the taxes paid were state income taxes and not real estate taxes, and therefore, no benefit was received in a prior year for the real estate taxes, and consequently the refund is not taxable,” he said.

Also, Bagner said, taxpayers in the Alternative Minimum Tax regime do not receive the benefit of state taxes/real estate tax deductions so state tax refunds and real estate tax refunds are generally either not taxable or limited based on a formula of what benefit you actually received in a prior year.

You should check with your tax preparer to see if how this all works for your specific situation.

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This story was originally published on Nov. 22, 2023.

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