Under the previous tax law, if you itemized and deducted your state income taxes but then got a state income tax refund, the refund was considered taxable income in the subsequent year's federal income tax. Under the new tax laws with 10k cap on
state income tax + property tax, will any refund still be 100% taxable?
As an example, in 2018, assuming married, joint filing:
- Property tax: 8k
- State income tax: 8k
- Other deductible expenses(e.g. mortgage interest, charitable contributions, etc.): 15k
- Total deductions: 25k (total tax deduction is 16k but capped at 10k)
During state income filing, we find out we've withheld too much and get a refund of $2k. How much (if any) is the refund considered taxable income? All of it because we itemized? None of it because we were able to fill up the 10k limit with property tax and state income tax? Prorated?
Related question: Are tax federal or state tax refunds taxable in the next tax year?