Tax Treatment of State and Local Tax Refunds
Tax Treatment of State and Local Tax Refunds Today, the IRS clarified the tax treatment of state and local tax refunds under the TCJA's cap on the state and local tax (SALT) deduction. Revenue Ruling 2019-11
provides four examples illustrating how to determine the portion of any state or local tax refund that must be included on the taxpayer’s federal income tax return. This ruling does not affect state tax refunds received in 2018 for tax returns currently being filed.
For tax years 2018-2025, the TCJA limits the itemized deduction for state and local taxes to $5,000 for a married person filing a separate return, and $10,000 for all other tax filers. Taxpayers who are impacted by the SALT limit - those taxpayers who itemize deductions and who paid state and local taxes in excess of the SALT limit - may not be required to include the entire state or local tax refund in income in the following year. A key part of that calculation is determining the amount the taxpayer would have deducted if the taxpayer only paid the actual state and local tax liability - no refund and no balance due. Click here