Saturday, March 23, 2019
The tax deadline is steadily approaching, but yet the Internal Revenue Service has yet to release guidance on an issue that has occurred for taxpayers because of the recent tax overhaul. The question is how the IRS will tax state-tax refunds given the new $10,000 cap on state and local tax deductions, or SALT.
The truth is that the majority of taxpayers will not have to be anxious about the situation. Michael Graetz, a former Treasury Department official that is now teaching at Columbia University's law school, says that there is a "longstanding legal doctrine means it won't be hard for most taxpayers subject to the SALT cap to minimize taxes on state refunds." This doctrine is known as the Tax Benefit Rule.
Under the doctrine, a "recovery" such as a state-tax refund is not taxable as gross income for the next year if deducting it did not yield a tax break according to Bryan Camp, a professor at Texas Tech University's law school. Because of this, millions of filers should not have to distinguish between types of state-tax deductions for 2018 because the SALT limitation combines them all into one unit.
Camp warns that not all refunds will be nontaxable. This result depends on other deductions and the size of these deductions.
See Laura Sanders, An Answer to a Tax Problem You Didn't Know You Had, Wall Street Journal, March 22, 2o19.
Special thanks to Joel C. Dobris (Professor of Law, UC Davis School of Law) for bringing this article to my attention.