Question

Noah who is single and uses the cash method of accounting, lives in a state that imposes an income tax. In April 2020, he files his state income tax return for 2019 and pays an additional $1,000 in state income taxes. During 2020, his withholdings for state income tax purposes amount to $7,400 and he pays estimated state income tax of $700. In April 2021, he files his state income tax return for 2020, claiming a refund of $1,800. Noah receives the refund in August 2021. Noah has no other state or local tax expenses.

A. Assuming that Noah itemized deductions in 2020, how much may he claim as a deduction for state income taxes on his Federal return for calendar year 2020 (filed April 2021)?

B. Assuming that Noah itemized deductions in 2020(which totaled $20,000), how will the refund of $1,800 that he got in 2021 be treated for Federal income tax purposes?

C. Assume that Noah itemized deductions in 2020 (Which totaled $20,000) and that he elects to have the $1,800 refund applied toward his 2021 state income tax liability. How will the $1,800 be treated for Federal income tax purposes?

D. Assuming that Noah did not itemize deductions in 2020, how will the refund of $1,800 received in 2021 be treated for Federal income tax purposes?

Please clearly explain.

Answer 1

Answer to (a)

Amount of deduction claim:

Previous year taxes paid i.e. 2019 = 1,000

Add: withheld for 2020 = 7,400

Add: Estimated tax payment = 700  

Total deduction claim = 9,100

Answer to (b):

Noah will include $ 1,800 in 2021 gross income to an extent the taxpayer derived a tax benefit from itemizing in 2019.

Answer to (c):

Noah will include $ 1,800 as income in 2021.

Answer to (d):

In 2021, if itemised deductions were not done, she is not required to report any of the $ 1800 refund as an income in 2021. Hence, noah will include $ 0.