In Year 1, for federal income tax purposes, Donald paid and deducted California income tax of...
In Year 1, for federal income tax purposes, Donald paid and deducted California income tax of $9,500. When the California income tax return was filed in mid March of Year 2, the return indicated that Donald would receive a $1,500 refund of California income tax. Donald received this refund later in the same month. Is the California refund a taxable income for Year 2?
Can you describe the tax benefit rule in your own words?
Homework Answers
Unlike federal tax refund, State tax refund is taxable.
In the given case, California tax refund received by Mr. Donald of $1500 is taxable
TAX BENEFIT RULE:
The amount of deduction which you claimed in the prior year has been recovered later, and due to such deduction if you've received any tax benefit; such recovered amount should be taxed in the year of receipt.
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