There is a longstanding tax benefit rule
that says you must include in income any state and local income tax refund for which you have received a tax benefit.
In Revenue Ruling 2019-11 (PDF), posted on IRS.gov, the IRS provided four examples illustrating how the long-standing tax benefit rule
interacts with the new SALT limit to determine the portion of any state or local tax refund that must be included on the taxpayers federal income tax return.
The rules also contain a tax benefit rule
, whereby the amount of an erroneous item allocated to a requesting spouse may be increased or decreased depending upon the tax benefit to each spouse.
Future recoveries will result in additional deductions or in gross income under the tax benefit rule
One common source that is frequently overlooked by tax advisors, and more often misunderstood, is the application of the tax benefit rule
(IRC section 111) to state and local tax refunds.
Explain how the Department applies the tax benefit rule
in the following situation:
If the insurance reimbursement is more than was expected, the excess may have to be reported as income under the tax benefit rule
.(10) In the event the reimbursement exceeds the taxpayer's loss, a gain results, and must be reported unless the taxpayer is allowed to postpone it.
corporate shareholders, it is not applicable to those policy dividends paid to either shareholders or members of a mutual which are includible in income under the "tax benefit rule
" (see IRC [Section] 111).
They argued that following the tax benefit rule
, the refunds were not includible in income because under New York law the credits were labeled as overpayments of state income tax, and they had not taken a deduction for state income tax paid in the preceding year on their income tax return for any of the years.
* Under the tax benefit rule
, some or all of an employer's deductions in an earlier year may have to be included in income in a later year if an event occurs that is fundamentally inconsistent with the premise on which the deduction was based.
Moreover, the tax benefit rule
does not require the refund be taken into income because the amount refunded was never deducted under California law.
Shorter represents a line of cases which indicate that New York tax law adheres to the tax benefit rule
. An early case which clearly stated this principle was Hunt v.