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 2015, she files her state income tax return for 2014 and pays an additional $1,000 in state income taxes. During 2015, her withholdings for state income tax purposes amount to $7,400, and she pays estimated state income tax of $700. In April 2016, she files her state income tax return for 2015, claiming a refund of $1,800. Norma receives the refund in August 2016.

A) Assuming that Norma itemized deductions in 2015, How much may she claim as a deduction for state income taxes on her federal return for calendar year 2015 (Filed April 2016)?

B) Assuming that Norma itemized deductions in 2015, how will the refund of $1,800 that she received in 2016 be treated for Federal income tax purposes?

C) Assume that Norma itemized deductions in 2015 and that she elects to have the $1,800 refund applied toward her 2016 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 2015, How will the refund of $1,800 received in 2016 be treated for federal income tax purposes?

Explanation / Answer

Ans a Norma can claim $1000+$7400+$700= $9100 as deduction for state income tax.

Ans b It will be treated as income of $1800 for Federal Income tax.

Ans c It will be treated as directly Tax free payment of future taxes as Norma has applied $1800 towards payment of her state income tax due.

Ans 4 The refund of $ 1800 will be treated as income in following year for Federal income tax purpose.

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