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    State Tax Refunds and Separate Returns

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    When is a state tax refund includable in income? Are married taxpayers filing separate returns eligible to use standard deductions or itemized deductions? Why?

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    Solution Preview

    IRC Section 111(a) states that "Gross income does not include income attributable to the recovery during the taxable year of any amount deducted in any prior taxable year to the extent such amount did not reduce the amount of tax imposed by this chapter." Thus, only that portion of state tax refund which reduced the tax paid in a prior year must be included in current year's ...

    Solution Summary

    This solution discusses when a state tax refund is includable in income and when married couples filing separate returns must itemize or take the standard deduction.