Taxing Definitions

Tax Benefit Rule

Thanks for sharing!
1 minute read
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 — Formally moving Image source: openclipart.org What do these two forms have in common? Screen capture by Taxing Lessons In the US, federal law says the information you supply on your tax return is confidential. Taxpayers use Form 2848, Power of Attorney and Declaration of Representative, to authori...
Definition — Laughter and other medical dedu... Image source: openclipart.org Laughter may be the best medicine, but it's also one you can't get a tax deduction for. Fortunately, plenty of other medical expenses qualify. What are those expenses? Here's a quiz to test your knowledge. 1 As a general rule, when adding up you...
Definition — Safe harbors and taxes Image source: OpenClipArt.org Back in August, the IRS issued proposed regulations about the new limitation on federal income tax deductions for state and local income taxes (see Taxing Lessons post here). After the proposed regulations were issued, the IRS continued to receive questio...
Definitions — More and less, yes or no   Image source: openclipart.org   In general, you're required to file a federal income tax return when your gross income is equal to or exceeds the sum of your exemption plus standard deduction (internal revenue code section 6012(a)(1)). For 2018 returns, to be filed in 2019, the...
Tagged , , ,