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 — Convenient meals   Image source: Public domain image from Dreamstime.com   Are you eating lunch at your desk? Perhaps your employer provides meals for a business reason, such as when the meals are necessary for you to do your job properly. These "convenience of employer" meals are not taxable to ...
Definition – A whale of a breach   Image source: Sho Hatakeyama on Unsplash Once more into the breach… The security breach of an Equifax online dispute portal from May to July 2017 was a whopper. According to a report published by the US Government Accountability Office in August 2018, records containing personally iden...
Definition — Collecting the debt   Image source: Kody Gautier on Unsplash   Have you heard about the guy who walked into an accounts receivable department to pay a compliment? The old joke may be a possibility for the private debt collection agencies hired by the government to collect delinquent tax debts. A cus...
Definition — Losing the deduction   Image source: Dawid Zawiła on Unsplash   One casualty of the December 2017 federal tax law was the personal casualty and theft loss deduction (section 165 of the internal revenue code). With a few exceptions, as of January 1, 2018, nonbusiness losses from sudden, unexpected, or...
Tagged , , ,