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

Definitions — Order in the court Image source:   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...
Definitions — Written in stone Image source: ©creativecommonsimages Dreamstime Stock Photos   If nothing is written in stone, then something must be written in stone, and that something is nothing. The stone referenced in a recent revenue procedure (revenue procedure 2017-60) was the aggregate used in residential f...
Definitions — Taxing business Image source: ©publicdomainphotos, Dreamstime Stock Photos   In September, just in time to celebrate the upcoming fiscal new year, the Joint Committee on Taxation released a report on the present US federal income tax law and data related to the taxation of business income. In addition t...
Definitions — Curtailing the number Image source:   Voluntary truncation hardly sounds like an enjoyable pastime. But cutting off part of taxpayer identification numbers may be a way to reduce identity theft. Back in 1936, when the Social Security Board created the nine-digit social security number to id...
Tagged , , ,