Federal and regional: what you need to know about different levels of taxes and refunds - ForumDaily
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Federal and regional: what you need to know about different levels of taxes and refunds

Does a state tax refund count as income for federal tax purposes? NJ.

Photo: Shutterstock

Do I have to pay federal taxes on the amount that the state returned to you as an overpayment?

The IRS has a so-called tax credit rule.

This rule states that if you receive a state income tax or property tax deduction in one year and receive a refund of some or all of the payments in the next year, you must include the refund as income on your next year's tax return if there was a tax benefit from deduction, said Bernie Keely, a certified financial planner and certified public accountant at Kiely Capital Management in Morristown.

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“Let's say you included income taxes or property taxes on Schedule A, but then you took the standard deduction because it was larger than your itemized deductions,” he said. “Because you took the standard deduction, there was no state income tax savings or estate tax deduction,” he said.

He said you didn't benefit from the deduction, so you don't need to include a refund or rebate on next year's tax return.

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