Rev Rul 2019-11 explains additional income from previously-deducted state tax refunds under TCJA

The IRS has issued Rev Rul 2019-11 to explain how tax benefits from the recovery of a state tax itemized deduction in a prior year is treated in a current tax year after the enactment of the “Tax Cuts and Jobs Act” (TCJA).

Examples are provided for explanation. If a taxpayer received a tax benefit from deducting state or local taxes in a prior taxable year, and the taxpayer recovers all or a portion of those taxes in the current taxable year from a refund of the taxes, the taxpayer must include in gross income the lesser of (1) the difference between the taxpayer’s total itemized deductions taken in the prior year and the amount of itemized deductions the taxpayer would have taken in the prior year had the taxpayer paid the proper amount of state and local tax; or (2) the difference between the taxpayer’s itemized deductions taken in the prior year and the standard deduction amount for the prior year, if the taxpayer was not precluded from taking the standard deduction in the prior year. This applies to the recovery of any state or local tax, including state or local income tax, and state or local real or personal property tax.