Norma, who uses the cash method of accounting, lives in a state that imposes an

Question

Norma, who uses the cash method of accounting, lives in a state that imposes an income tax. In April 2012, she files her state income tax return for 2011 and pays an additional $1,000 in state income taxes. During 2012, her withholdings for state income tax purposes amount to $7,400, and she pays estimated state income tax $700. In April 2013, she files her state income tax return for 2012, claiming a refund of $1,800. Norma receives the refund in August 2013.
a) Assuming that Norma itemized deductions in 2012, how much may she claim as a deduction for state income taxes on her federal return for calendar year 2012 (filed April 2013)?
b) Assuming that Norma itemized deductions in 2012, how will the refund of $1,800 that she received in 2013 be treated for federal income tax purposes?
c) Assume that Norma itemized deductions in 2013 state income tax liability. How will the $1,800 be treated for federal income tax purposes?
d) Assuming that Norma did not itemize deductions in 2012, how will the refund of $1,800 received in 2013 be treated for federal income tax purposes?

Explanation / Answer

Her deduction is limited to the amounts paid in 2012. The $1800 refund is reported as income in 2013 under the tax benefit rule. Norma

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