An Answer to a SALT-y Tax Problem You Didn't Know You Had
Was a bit confusing to me but perhaps some would make sense
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By Laura Saunders
(snip)
This issue may be unfamiliar to some, so here’s what’s at stake. Taxpayers who “itemize” deductions on Schedule A—as opposed to taking the standard deduction—list their total payments for state and local property and income or sales taxes. If these filers then receive a state-tax refund, it usually has to be included as taxable income on the filer’s return the next year. For example, if an itemizer received a $5,000 refund of 2017 state-income taxes, then it often counts as taxable income on the filer’s 2018 federal return. Without this rule, people could get two federal tax breaks for the same income
The tax overhaul passed by Congress at the end of 2017, however, imposed a $10,000 cap on SALT deductions. That has raised new questions about the tax treatment of state-issued refunds. Say a filer lists $10,000 of property taxes and $20,000 of state income taxes on his federal return for 2018 and then receives a $5,000 state income-tax refund this year. Will two-thirds of the state refund be taxable in 2019, at rates up to 37%, because two-thirds of the SALT write-off was due to state income tax?
Or, will none of the refund be taxable if the filer simply deducts $10,000 of property tax and omits the income tax? According to Mr. Graetz and other scholars, none of the refund is taxable if the total state taxes paid, minus the refund, are $10,000 or more. In this example, the total state income taxes and property taxes are $30,000 and the refund is $5,000. So the net amount of $25,000 is greater than the $10,000 cap, and the $5,000 refund isn’t taxable.
This answer springs from a legal doctrine known as the Tax Benefit Rule. Under it, a “recovery” like a state-tax refund isn’t taxable if deducting it didn’t yield a tax break, says Bryan Camp, a former IRS attorney who is now a professor at Texas Tech University’s law school. As a result, millions of filers shouldn’t have to distinguish between types of state-tax deductions for 2018 because the SALT limitation combines them all into one unit.
Many people, including some experts, are unaware of this answer. Robert Gordon, a tax strategist who owns Twenty-First Securities in New York, is expecting a large state income-tax refund this year. His return preparer advised him to deduct only his property taxes and state sales taxes, which total more than $10,000, to make it clear that his state-tax refund won’t be taxable on his 2019 federal return.
More..
https://www.wsj.com/articles/an-answer-to-a-salt-y-tax-problem-you-didnt-know-you-had-11553247005 (paid subscription)
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As I noted, confusing to me, since our property and state taxes are not more than $10K. I did, however, get a message from this: since for 2018 I used the standard deductions, the state refund will not be added to our 2019 income. (I already am having a spreadsheet running..)
= new reply since forum marked as read
