Local tax refund taxable? Salt caps

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nic3456
Posts: 86
Joined: Fri Dec 19, 2008 10:42 am

Local tax refund taxable? Salt caps

Post by nic3456 »

Are local tax refunds still subject to federal taxes if the amounts weren’t actually deducted the previous year due to salt limits?

For example If I had $15,000 of total salt taxes
$8,000 property tax
$5,000 state
$2,000 city

After filing taxes the city sends me $500 refund - is there a way for that to be non taxable since in theory I didn’t deduct any city taxes the prior year due to the $10k salt caps?

Overall I do itemize and choose the salt taxes in lieu of sales taxes.
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FiveK
Posts: 12124
Joined: Sun Mar 16, 2014 2:43 pm

Re: Local tax refund taxable? Salt caps

Post by FiveK »

If in practice you get State And Local Tax (SALT) refunds less than the excess of the amount you paid over $10K, then those refunds are not taxable.

See With new SALT limit, IRS explains tax treatment of state and local tax refunds | Internal Revenue Service for a more authoritative opinion.
Hyperchicken
Posts: 861
Joined: Mon Mar 02, 2020 5:33 pm

Re: Local tax refund taxable? Salt caps

Post by Hyperchicken »

The general rule is, if you calculate your federal tax using your actual state tax liability instead of withheld state tax, would there be a difference? The refund is taxable to the extent that you benefitted from deducting your withheld state tax instead of your actual state tax. Local is treated the same as state, I believe.
Topic Author
nic3456
Posts: 86
Joined: Fri Dec 19, 2008 10:42 am

Re: Local tax refund taxable? Salt caps

Post by nic3456 »

Thanks, that makes sense , now I just have to make sure I calculated properly.
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