is state tax refund income with new tax law 2018

dont think i see this in the forum, but i would like to know thoughts on the following: in light of the state taxes not being deductible on the federal return anymore for 2018 (10,000 limit for prop and state inc taxes etc), would the state refund from 2017 be includible in income for 2018. thank you

It would unless it did not produce a tax benefit when it was deducted. See section 111.

"...when it was deducted, if it was deducted." Dontcha sorta wish the state tax payment could have been made with something that wasn't fungible?

SALT wasn't subject to a limitation for 2017. The only way SALT refunds wouldn't be taxable on the 2018 return is if the taxpayer was in AMT for 2017 or took the standard deduction.

Does anyone know if there's guidance yet for 2018 and forward? e.g. if for the 2018 tax year there is a refund and SALT limitation for taxpayer, do we consider the whole refund up to the SALT limitation non-taxable or is there a proration involved between income tax and property tax.

Does anyone know if there's guidance yet for 2018 and forward? e.g. if for the 2018 tax year there is a refund and SALT limitation for taxpayer, do we consider the whole refund up to the SALT limitation non-taxable or is there a proration involved between income tax and property tax.

I don't know if there will be guidance, but I don't think there needs to be. This should be straight-up §111.

All else equal, if you pay $11k in state taxes, limited deduction to $10k, and you get a $600 refund the following year, the refund would be nontaxable as the $600 overpayment never created a tax benefit. If you pay $11k in state taxes, limited deduction to $10k, and you get a $1,300 refund the following year, $300 should be taxable as it created a tax benefit.

I don't know if there will be guidance, but I don't think there needs to be. This should be straight-up §111

You're missing the point. What if you paid $6,000 real estate property tax, $6,000 state income tax, and get a $2,000 state income tax refund (and no refund of property tax). Is any of it taxable?

You're missing the point. What if you paid $6,000 real estate property tax, $6,000 state income tax, and get a $2,000 state income tax refund (and no refund of property tax). Is any of it taxable?

No. The $2,000 in excess SALT deductions did not reduce the taxpayer's tax, therefore the next year's refund of $2,000 would not be taxable. See §111(a), as clarified by the concept of "recovery exclusion" in §1.111-1(a).

Depends on how you look at it.

If we're saying property taxes "fill up the cup" first. It would be correct to say that the 2k isn't taxable under Sec 111.

If we're saying it's proportional, which is what I think makbo is getting at -- and my original query related to, 5k of property tax is allowed and 5k of state income tax is allowed. 1k of property tax is disallowed and 1k of state income tax is disallowed. For a 2k state income tax refund, 1k would be taxable in this situation under Sec 111.

That's why I asked about guidance.

Depends on how you look at it.

If we're saying property taxes "fill up the cup" first. It would be correct to say that the 2k isn't taxable under Sec 111.

Exactly. We don't have any guidance on what "fills up the cup" first. For example, in this scenario, I would certainly like all of the property tax to be included in the $10K limit. On the other hand, if subject to NII tax, I'd probably like more of the state income tax to be included.

There is no "fills up the cup" or first deduction or last deduction or anything like it here. You have $12,000 in state taxes of which the first $10,000 are fully deductible. Thus, there is a recovery exclusion of $2,000. It does not matter which specific $2,000 in state taxes gets refunded, because even if you didn't have the overpayment you still would have had $10,000 in taxes generating the $10,000 maximum deduction.

By the way, this scenario of a maximum deductible benefit for SALT (with a refund of an overpayment) has already existed for a while due to AMT.

In trying to do some additional research for my own edification, I ran into this:

§1.111-1(a)(1) says, "Bad debts, prior taxes, and delinquency amounts are defined in section 111(b) (1), (2), and (3), respectively."

But §111(b) actually has nothing to do with deductions, only credits. This section makes no mention of bad debts, prior taxes and delinquency amounts.

What am I reading wrong?

missingdonut wrote

"...of which the first $10,000 are fully deductible."

Please define the term "first" as it is used in this phrase. Is it "first" as in the earliest one paid, "first" as in the top one on the list in your files, or "first" as in the one that closest to the beginning of the alphabet...?

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[Added shortly later] Please note the use of this "first" concept in the Regs cited just above by makbo:

"Care should be taken in the case of bad debts which were treated as only partially worthless in prior years to distinguish between the item described in section 111, that is, the part of such debt which was deducted, and the part not previously deducted, which is not a section 111 item and is considered the first part collected." [emphasis added]

makbo, the reg looks to have been written in the 50s, but §111 was redone in the '84 tax act.

Please define the term "first" as it is used in this phrase. Is it "first" as in the earliest one paid, as in the top one on the list in your files, or as in the one that closest to the beginning of the alphabet...?

That's what I get for being colloquial. I meant it in saying that $10,000 are 100% deductible and any amount above that is not.

missingdonut - I think you are missing the question.

$20,000 property taxes and $4,000 state income tax. State refund is $2,500.

Until we receive guidance, one could argue the SALT deduction is $8,333 prop tax, $1,667 state income tax. Another could argue that I only deducted the property taxes, and none of the state refund is taxable.

You are saying this is fully taxable?

News at 11:00

I don't think this is any different than the discussions surrounding vehicle expenses on form 2106 (that used to be subject to 2% MID)

Should I reduce the basis in my vehicle by 100% of the depreciation claimed, when the 2% kicked out 80% of my total auto deduction?

$20,000 property taxes and $4,000 state income tax. State refund is $2,500. [...]

You are saying this is fully taxable?

No, it's fully non-taxable.

Yeah we're going to need some guidance....

On the other hand, if subject to NII tax, I'd probably like more of the state income tax to be included.

I don't think the state tax deduction on form 8960 is related to whether you itemize or not.

In trying to do some additional research for my own edification, I ran into this:

§1.111-1(a)(1) says, "Bad debts, prior taxes, and delinquency amounts are defined in section 111(b) (1), (2), and (3), respectively."

But §111(b) actually has nothing to do with deductions, only credits. This section makes no mention of bad debts, prior taxes and delinquency amounts.

What am I reading wrong?

This is another one of those cases where the Treasury regulation (in this case, 1.111-1) has not been updated to reflect amendments to the Internal Revenue Code. The amendments in question were enacted in July of 1984. Specifically, the reference to bad debts, prior taxes, etc., is a reference to Internal Revenue Code section 111 as it was worded prior to amendment by section 171(a) of the Deficit Reduction Act of 1984, Pub. L. No. 98-369 (July 18, 1984).

Prior to that amendment, the title of section 111 was "RECOVERY OF BAD DEBTS, PRIOR TAXES, AND DELINQUENCY AMOUNTS". This prior version applied to tax years ending on or before December 31, 1983.

Subsection (a) of this prior section 111 stated:

Gross income does not include income attributable to the recovery during the taxable year of a bad debt, prior tax, or delinquency amount, to the extent of the amount of the recovery exclusion with respect to such debt, tax, or amount.

Subsection (b) included various definitions for "bad debt", "prior tax", etc.

EDIT: I just noticed that missingdonut also answered the question, in post #13 above.