Question

Tonya is a cash basis taxpayer. In 2014, she paid state income taxes of $8,000. In early 2015, she filed her 2014 state income tax return and received a $900 refund.

a. If Tonya itemized her deductions in 2014 on her Federal income tax return, she should amend her 2014 return and reduce her itemized deductions by $900.
b. If Tonya itemized her deductions in 2014on her Federal income tax return and her itemized deductions exceeded the standard deduction by at least $900, the refund will not affect her 2015 tax return.
c. If Tonya itemized her deductions in 2014 on her Federal income tax return, she must amend her 2014 Federal income tax return and use the standard deduction.
d. If Tonya itemized her deductions in 2014 on her Federal income tax return and her itemized deductions exceeded the standard deduction by more than $900, she must recognize $900 income in 2015 under the tax benefit rule.
e. None of these.

Answer 1

If Tonya itemized her deductions in 2014 on her Federal income tax return and her itemized deductions exceeded the standard deduction by at least $900, the refund will not affect her 2015 tax return.

Step-by-step explanation:

The correct answer is b. If Tonya itemized her deductions in 2014 on her Federal income tax return and her itemized deductions exceeded the standard deduction by at least $900, the refund will not affect her 2015 tax return.

When Tonya itemized her deductions, she reduced her taxable income by the amount of her itemized deductions.

However, her state income tax refund is not taxable income for federal tax purposes if she deducted those state income taxes on her 2014 return and received a tax benefit.