Question

Sam, a single individual, took an itemized deduction of $5,500 for state income tax paid in 2019. His total itemized deductions in 2019 were $18,000 and did not include any other state or local taxes. In 2020, he received a $900 refund of his 2019 state income tax. Sam must include the $900 refund in his 2020 Federal gross income in accordance with the tax benefit rule.

A. True
B. False

Answer 1

Sam must include the $900 refund of his 2019 state income tax in his 2020 Federal gross income, in accordance with the tax benefit rule.

Step-by-step explanation:

According to the tax benefit rule, Sam must include the $900 refund of his 2019 state income tax in his 2020 Federal gross income. This rule states that if a taxpayer receives a tax benefit in one year and later recovers part or all of the tax benefit, the recovered amount must be included as income in the year of recovery.

In Sam's case, when he claimed the $5,500 state income tax deduction in 2019, he received a tax benefit. However, when he received a refund of $900 in 2020, he recovered part of that tax benefit. Therefore, Sam must include the $900 refund in his 2020 Federal gross income.