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Video instructions and help with filling out and completing Are Form 2350 Refunds

Instructions and Help about Are Form 2350 Refunds

In this presentation, we will discuss the effect of a tax refund from the state on federal income taxes. In other words, if we receive a tax refund from the states, do we have to include it in gross income for federal income taxes? Do we have to pay federal income taxes on the refund from the state? For more accounting information and accounting courses, visit our website at accountinginstruction.info. The answer to this question often depends on the amount of the state or local tax refund. If in the prior year, the refund was deducted as an itemized deduction, then it does make sense. However, it takes a little bit of thinking in terms of the timing differences that are happening when we think about the tax deductions. So with the state taxes, it's really kind of confusing to have the state taxes be deductible on the federal return. That's the confusing component of this. We typically get a deduction for the state and local taxes. For example, if we're in a state that has income tax, then we often get to deduct that income tax on our federal tax return. However, the income tax that we get to deduct is an itemized deduction. So that means we're only getting a benefit from that deduction if we itemize. But we also know that if we overpay the state tax, so in year 1 if we overpaid the state tax, then we would get a deduction higher than the amount that we actually paid in taxes because we're going to get a refund. So, in other words, if we claim state tax payments of $10,000 in year 1 and we get a deduction for the federal income taxes for the $10,000, and then the state gives us back $3,000, well then...