Question

Tonya is a cash basis taxpayer. In 2019, she paid state income taxes of $8,000. In early 2020, she filed her 2019 state income tax return and received a $900 refund.

A. If Tonya itemized her deductions in 2019 on her Federal income tax return, she should amend her 2019 return and reduce her itemized deductions by $900.
B. If Tonya itemized her deductions in 2019 on her Federal income tax return and her itemized deductions exceeded the standard deduction by at least $900, the refund will not affect her 2020 tax return.
C. If Tonya itemized her deductions in 2019 on her Federal income tax return, she must amend her 2019 Federal income tax return and use the standard deduction.
D. If Tonya itemized her deductions in 2019 on her Federal income tax return and her itemized deductions exceeded the standard deduction by more than $900, she must recognize $900 income in 2020 under the tax benefit rule.

Answer 1

The correct answer is B. If Tonya itemized her deductions in 2019 on her Federal income tax return and her itemized deductions exceeded the standard deduction by at least $900, the refund will not affect her 2020 tax return.

Step-by-step explanation:

The correct answer is B. If Tonya itemized her deductions in 2019 on her Federal income tax return and her itemized deductions exceeded the standard deduction by at least $900, the refund will not affect her 2020 tax return.

When Tonya itemized her deductions in 2019, she claimed the $8,000 paid for state income taxes as an itemized deduction on her Federal income tax return. However, since she received a $900 refund in 2020, this suggests that her itemized deductions exceeded the standard deduction by at least $900 ($8,000 - $900 = $7,100).

For the refund to affect her 2020 tax return, her itemized deductions needed to be less than the standard deduction. However, since her itemized deductions exceeded the standard deduction by at least $900, the refund will not affect her tax return for 2020.