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Will my state tax refund be taxable on next years federal return?

I made a 2009 estimated state tax payment in 2008 of $5,000. I will owe no state tax, so I will be getting a full refund in 2009. I also owe no federal tax, even without the $5,000 state tax deduction.

If 2009 turns out better and I have to pay federal tax, will the $5,000 state tax refund be taxable? It shouldn't be, since I didn't get any tax benefit on the payment so why should I pay tax on the refund, but you never know.

Odds are it will be moot, since 2009 doesn't look any better at this point, but you never know.

Reply to
Tom
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The rule is that if you took a deduction for the state tax payment, then you have to pay tax on the refund the following year. If you didn't take the deduction then you don't have to pay tax on the refund. They basically cancel each other out, except for potential differences in tax rates.

Reply to
Barry Margolin

Except you're ignoring IRC 111.

If the tax is the same (zero) with and without the deduction, no tax benefit arose from claiming the deduction and thus a refund of the amount may be excluded.

Reply to
D. Stussy

Well, I am taking the deduction because in TaxCut that is how you tell TaxCut you paid it on your state tax.

Do I still get not to pay taxes on the refund, or do I have to manually remove it from the federal return; which I can do if necessary.

Reply to
Tom

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