Tax Benefit Rule

Tax Benefit Rule - Example 1. Tom does not itemize...

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Tax Benefit Rule Helpful formula for the tax benefit rule: When a taxpayer receives a refund of state taxes paid in an earlier, the tax benefit rule determines if the refund amount is includable in income for the year in which it’s received. First, if the taxpayer did not itemize deductions in the earlier year, then the refund is not taxable in the year it is received. If the taxpayer did itemize deductions in the earlier year, then some or all of it will be taxable. The following “formula” tells you how much is taxable. Compare the total itemized deductions claimed in the earlier year with the standard deduction amount for the year ($5,700 for single taxpayers). Let’s call this result “amount A.” Then, include in income the lesser of (a) Amount A, and (b) the amount of the refund.
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Unformatted text preview: Example 1. Tom does not itemize deductions in 2009. In 2010 he receives a $700 state tax refund. None of the refund is taxable in 2010. Example 2. Tom claims $10,000 in itemized deductions in 2009. Amount A is $4,300 ($10,000 of itemized deductions minus the $5,700 standard deduction). In 2010 he receives a $700 state tax refund. The amount to include in income is $700 the lesser of (a) amount A ($4,300), or (b) the amount of the refund ($700). Example 3. Tom claims $6,100 in itemized deductions in 2009. Amount A is $400 ($6,100 of itemized deductions minus the $5,700 standard deduction). In 2010 he receives a $700 state tax refund. The amount to include in income is $400 the lesser of (a) amount A ($400), or (b) the amount of the refund ($700)....
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This note was uploaded on 09/30/2011 for the course ECO 373 taught by Professor Qq during the Spring '11 term at CUNY Hunter.

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