Question

Jackie is a cash basis taxpayer. In 2016, she paid state income taxes of $15,000. In early 2017, she filed her 2016 state income tax return and received a $1,500 refund. Which of the following statements is true?

a) Jackie includes the $1,500 refund in her 2017 income.
b) Jackie needs to amend her 2016 tax return.
c) The refund does not affect Jackie's taxable income.
d) Jackie can carry forward the refund to offset future income.

Answer 1

The refund does not affect Jackie's taxable income.

Step-by-step explanation:

The correct statement is c) The refund does not affect Jackie's taxable income.

As a cash basis taxpayer, Jackie reports income and deductions in the year they are received or paid. Since she paid the state income taxes in 2016, it will be deducted from her taxable income for that year. The fact that she received a $1,500 refund in early 2017 does not affect her 2016 taxable income because it is considered a return of overpaid taxes, not additional income.

Therefore, Jackie does not need to include the refund in her 2017 income as it does not affect her taxable income and she does not need to amend her 2016 tax return either.