Taxing Definitions

Tax Benefit Rule

Thanks for sharing!
RulersImage source: Frank C. Müller via Wikimedia Commons

Sometimes financial events straddle more than a single year. That can be a problem when your tax return needs to be filed on an annual basis.

The tax benefit rule is one way to address this timing difference.

For instance, say you take an itemized deduction on your federal income tax return for the amount of state income tax you paid during the year. Later, you discover you overpaid your state income tax and get a refund.

Since you received a benefit on your federal income tax return from the deduction, part of the refund may be taxable to you under the tax benefit rule. If so, you report that amount as income in the year you receive it–which generally is the year after you took the deduction.

What if you didn’t itemize in the prior year, but used the standard deduction instead? No tax benefit last year, no income this year.

The tax benefit rule began as a judicial holding (see Estate of Block v. Commissioner of Internal Revenue, 39 BTA 338 – Board of Tax Appeals 1939), and later became part of the Internal Revenue Code (Section 111).

***

Other posts you might enjoy

Definition — The tipping point Image source: Sam Truong Dan on Unsplash   To tax those tips or not? Tips are not defined in the tax code or regulations so the determination of whether a payment is a tip depends on four factors. The absence of any one factor creates doubt as to whether the payments are tips. In Offi...
Definition — Identifying the employer Photo by Nick Hillier on Unsplash   What's your number? If you're required to file certain business tax returns, the answer is an employer identification number, or EIN. The IRS assigns employer identification numbers when you file an application (generally Form SS-4). In fiscal year 201...
Definition — Virtually taxable Image source: wpclipart.com   If you want to know the value of money, both real and virtual, you can try to borrow some. Or, in the case of digital currency, you could ask the Internal Revenue Service. The buying and selling of digital assets, including coins and tokens offered and so...
Definitions — Order in the court Image source: openclipart.org   If it please the court … A few weeks ago, the national taxpayer advocate released the 2017 Annual Report to Congress, as required by law. (Section 7803(c)(2)(B)(ii)) Part of the first volume of the report discusses the ten most litigated issues as measu...
Tagged , , ,