The IRS has issued Rev. Rul. 2019-11
to address uncertainties in determining the portion of state and local tax (SALT) refunds that must be included in gross income following enactment of the SALT deduction limitation.
Under the “tax benefit rule,” taxpayers are generally required to include refunds of state tax that they deducted in the prior year in gross income to the extent those refunds would have reduced prior-year tax liability. The addition of Section 164(b)(6) by the Tax Cuts and Jobs Act, which imposes a $10,000 cap on the SALT deduction for individuals, created some confusion regarding the circumstances that trigger the inclusion of a SALT refund in gross income and how the inclusion amount should be calculated.
The IRS generally holds that an inclusion is required for taxpayers who receive a tax benefit as a result of deducting an overpayment of state and local tax in a prior year and then recovering some or all of that overpayment through a refund in the current year. The amount of the inclusion is determined as the lesser of these two scenarios:
- The difference between the taxpayer’s actual itemized deductions in the prior year and the amount the taxpayer would have taken as an itemized deduction had they not overpaid their SALT liability
- The difference between the taxpayer’s prior-year itemized deductions and the prior-year standard deduction, provided the taxpayer is eligible for the standard deduction.
The ruling includes four examples illustrating different ways SALT refunds, the SALT deduction limitation, and the tax benefit rule interact, as well as how the gross income inclusion, if any, is determined in each scenario. The holding applies to the refund of any state or local tax.
Washington National Tax Office
+1 202 521 1515
Washington National Tax Office
+1 202 521 1511
Tax professional standards statement
This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.
The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.