Question

Brad, who uses the cash method of accounting, lives in a state that imposes an income tax (including withholding from wages). On April 14, 2016, he files his state return for 2015, paying an additional $600 in state income taxes. During 2016, his withholdings for state income tax purposes amount to $3,550. On April 13, 2017, he files his state return for 2016, claiming a refund of $800. Brad received the refund on August 3, 2017.

a) If Brad itemized his deductions, how much may Brad claim as a deduction for state income taxes on his Federal income tax return for calendar year 2016 (filed in April 2017)?

b) If Brad itemized his deductions, how will the refund of $800 that he received in 2017 be treated for Federal income tax purposes?

c) Assume that Brad itemized deductions in 2017 and that he elected to have the $800 refund applied toward his 2017 state income tax liability. How will the $800 be treated for Federal income tax purposes?

d) Assuming that Brad did NOT itemize deductions in 2016, how will the refund of $800 received in 2017 be treated for Federal income tax purposes?

Answer 1

a) Itemized Deductions: Itemizing your deductions means listing out eachdeduction you qualify for

If Brad has itemized the deductions he can claim the amount paid to sales tax as $600 during the year 2016

b) In this case if Brad has optimized the resources, the refund of $800 from Federal Income tax can be shown as deduction from the income tax payable for 2017

c) In this case The refund of $800 be treated as income accrued from federal income tax authorities and shows it as a indirect income and shows as a asset in financials

d) If Brad has not itemised the deductions he can not claim refund in the books of 2016 and he has to show this claim of $800 under the indirect income and has to pay tax even on this income in 2017