Written by TaxSpeaker
Home of Ron Roberson our 2019 2-Day Federal Tax Conference Presenter! See Conference Details
We just received an email question in our Taxspeaker Q&A series about a mid-size client receiving a $400,000 penalty letter for failing to provide health insurance to employees. There continues to be an incredible amount of incorrect information about health insurance rules for small and medium size businesses, health care related fringe benefits and other employer provided fringe benefits after TCJA.
The IRS just released new guidance on the taxation of state tax refunds as a result of the TCJA limits on state and local tax deductions. Part of our fall 1040 and our 1040 Boot Camp will include in-depth discussion of the topic, and I decided to include the several hours of work on my part in this week’s newsletter for your use, so read on. This is a tough topic!
The IRS released Revenue Ruling 2019-11 in 2019 to explain how to handle the taxability of individual state income tax rules after 2017’s TCJA limited the state and local income and property tax deduction to a maximum of $10,000 for the years 2018-2025. The limitation does not apply to foreign taxes or to business taxes.
The problem and solution are related to something called the tax benefit rule which, in layman’s terms, states that a refund in a later year of something deducted in an earlier is taxable in the later year, but only if it actually provided a tax savings in the earlier year. This rule, from Internal Revenue Code Section 111, has been applied for decades. As an example, if in prior years a taxpayer did not itemize deductions, later state tax refunds were not taxable because no “tax benefit” had been received from the amounts paid in the earlier year.
With the new rules it is also possible that a state tax refund may not be taxable even if the taxpayer itemized in the prior year!
The new rules utilize the same tax treatment but require a lot more calculation. The new rules state that the later year refund is taxable in the later year if the taxpayer received a benefit in an earlier year, limited to the lesser of:
- Amount of state and local refunds received in later years, or
- Net prior year itemized deduction change (Schedule 2), or
- Reduction of itemized deductions to the standard deduction limit.