The Tax Cuts and Jobs Act limits an individual’s deduction for some state and local taxes paid to $10,000 ($5,000 for a married individual filing a separate return) for tax years beginning after Dec. 31, 2017 and ending before Jan. 1, 2026. The limitation does not apply to real estate taxes paid related to business or investment related activities. The IRS released guidance on March 29, 2019 regarding the tax treatment of state and local tax refunds received where a tax deduction was taken in a prior year. The guidance describes four different scenarios where the taxpayer receives a state income tax refund in a subsequent year. If the taxpayer received a tax benefit in the prior year, the taxpayer is required to include in income the lesser of:
- The total itemized deductions from the prior year less the itemized deductions if the proper amount of tax was deducted in the prior year, or
- The total itemized deductions from the prior year less the standard deduction in the prior year.
There is no inclusion for refunds where there was no tax benefit in the prior year.