A taxpayer itemizes deductions and claims $15,000 for tax year 2022 with a state tax deduction of $10,000. How much must they report from a $750 state tax refund in 2023?

To determine how much of the state tax refund a taxpayer must report as income in the following year, the tax benefit rule applies. This rule states that only the amount of the refund that provided a tax benefit when the taxpayer itemized their deductions is included as taxable income.

In this scenario, the taxpayer itemized deductions totaling $15,000, which includes a state tax deduction of $10,000. The total deduction amount forms the basis for the tax refund calculation. However, the IRS limits the deduction for state and local taxes to $10,000. Since the taxpayer claimed the maximum amount for state and local taxes, they did not receive any tax benefit from the state tax paid beyond this limit.

The crucial point is that since the taxpayer only received a $750 refund from state taxes, they did not receive any tax benefit from this amount when they initially itemized their deductions. Therefore, the entire refund does not count as taxable income for 2023.

Thus, the taxpayer must report $0 from their $750 state tax refund, as it did not provide any tax benefit in the prior year.