Question

Derek, a cash basis, unmarried taxpayer, had $2,580 of state income tax withheld during 2020. Also in 2020, Derek paid $258 that was due when he filed his 2019 state income tax return and made estimated payments of $5,160 towards his 2020 state income tax liability. When Derek files his 2020 Federal income tax return in April 2021, he elects to take the standard deduction, which reduced his taxable income. As a result of overpaying his 2020 state income tax, Derek receives a refund of $1,806 early in 2021.

How much of the $1,806 will Derek include in his 2021 gross income?

Answer 1

Derek does not need to include any portion of the $1,806 state tax refund in his 2021 gross income because he took the standard deduction and did not itemize in 2020.

Step-by-step explanation:

As a cash basis taxpayer, Derek must include in his gross income for 2021 all refunds of state income tax that he deducted in a prior year to the extent that the deduction reduced his taxable income. Since Derek elected to take the standard deduction in 2020, he did not itemize deductions and therefore did not receive a tax benefit from the state tax payments. Consequently, none of the $1,806 state tax refund Derek received in 2021 is taxable, and he should include $0 of the refund in his 2021 gross income.