Question

Brad, who uses the cash method of accounting, lives in a state that imposes an income tax (including withholding from wages). On April 14, 2020, he files his state return for 2019, paying an additional $600 in state income taxes. During 2020, his withholdings for state income tax purposes amount to $3,550. On April 13, 2021, he files his state return for 2020 claiming a refund of $800. Brad receives the refund on June 3, 2021. If he itemizes deductions, how much may Brad claim as a deduction for state income taxes on his Federal income tax return for calendar year 2020 (filed in April 2021)?

a. $3,350
b. $5,150
c. None of these
d. $4,150 $3,550

Answer 1

Brad can claim a total deduction of $4,150 for state income taxes on his federal income tax return for 2020, which includes the $600 paid for 2019 state taxes and the $3,550 withheld in 2020.

Step-by-step explanation:

Brad is using the cash method of accounting for his transactions. For the federal income tax return, the deduction for state income taxes is based on the taxes actually paid during the calendar year. In 2020, Brad paid an additional $600 for his 2019 state income taxes and had state income tax withholdings of $3,550 during 2020.

Even though he received a refund of $800 for his 2020 state taxes in 2021, this event does not affect his 2020 federal tax return because the refund was received in a different tax year. Therefore, Brad can claim a total deduction for state income taxes of $4,150 on his federal income tax return for the calendar year 2020. This figure is the sum of the $600 payment made for the 2019 taxes and the $3,550 withheld in 2020.