ExpertHard1 markMultiple Choice
CPA · Question 55 · Area IV: Individual Taxation
A taxpayer received a $5,000 state income tax refund in Year 2 for taxes paid in Year 1. In Year 1, the taxpayer took the standard deduction. How much of the refund is taxable in Year 2?
A taxpayer received a $5,000 state income tax refund in Year 2 for taxes paid in Year 1. In Year 1, the taxpayer took the standard deduction. How much of the refund is taxable in Year 2?
Answer options:
A.
$0
B.
$5,000
C.
$2,500
D.
$10,000
How to approach this question
Standard Deduction in prior year = Refund is Tax Free.
Full Answer
A.$0✓ Correct
A
Under the tax benefit rule, a refund of state taxes is taxable only if the taxes were deducted in a prior year and provided a tax benefit. Since the taxpayer took the standard deduction, they did not deduct the state taxes, so the refund is not taxable.
Common mistakes
Assuming all refunds are taxable.
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