Exercise 10-18 (Algorithmic) (LO. 4)
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Feb 20, 2024
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Exercise 10-18 (Algorithmic) (LO. 4)
Derek, a cash basis, unmarried taxpayer, had $2,460 of state income tax withheld during 2023. Also in 2023, Derek paid $246 that was due
when he filed his 2022 state income tax return and made estimated payments of $4,920 toward his 2023 state income tax liability. When
Derek files his 2023 Federal income tax return in April 2024, he elects to take the standard deduction, which reduced his taxable income.
As a result of overpaying his 2023 state income tax, Derek receives a refund of $1,722 early in 2024.
How much of the $1,722 will Derek include in his 2024 gross income?
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Cash basis taxpayers deduct state income taxes in the year paid regardless of the year to which the payment relates. The tax benefit rule
applies to state income tax refunds.
Post-Submission
Answer: $0.
Cash basis taxpayers are entitled to deduct state income taxes withheld by the employer in the year the taxes are withheld. In addition,
estimated state income tax payments are deductible in the year the payment is made by cash basis taxpayers even if the payments relate
to a prior or subsequent year. If the taxpayer overpays state income taxes because of excessive withholdings or estimated tax payments,
the refund received is included in gross income of the following year to the extent the deduction reduced taxable income in the prior year.
However, if you claimed the standard deduction on your federal tax return last year, or if you elected to deduct state and local general sales
taxes instead of state and local income taxes, the refund received will not be included in gross income.
In this case, since Derek does not elect to itemize his deductions, he has not benefited from deducting the state taxes. Therefore, none of
the refund is included in his 2024 gross income.
Solution
Exercise 10-18 (Algorithmic) (LO. 4)
Derek, a cash basis, unmarried taxpayer, had $2,460 of state income tax withheld during 2023. Also in 2023, Derek paid $246 that was due
when he filed his 2022 state income tax return and made estimated payments of $4,920 toward his 2023 state income tax liability. When
Derek files his 2023 Federal income tax return in April 2024, he elects to take the standard deduction, which reduced his taxable income.
As a result of overpaying his 2023 state income tax, Derek receives a refund of $1,722 early in 2024.
How much of the $1,722 will Derek include in his 2024 gross income?
$0 $0
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