When the Tax Cuts and Jobs Act limited the SALT deduction, several states challenged the change in court and even tried to find other loopholes. To alleviate any confusion surrounding the new limitation, the Internal Revenue Service recently issued Revenue Ruling 2019-11. It outlines how taxpayers should treat their now-limited SALT deductions on tax year (TY) 2018 returns and explains how those decisions could affect their tax return next year.
The revenue ruling is a series of four filing-as-single scenarios. It lays out the background of each situation before explaining relevant tax law and detailing the interaction between state tax refunds, the SALT deduction, and gross income. While state refunds that affect the state tax owed will probably need to be claimed in the follow year’s gross income, these scenarios demonstrate how that might not always be the case.
The name for each scenario solution is derived from whether the state tax refund would be considered includable in TY 2019. The first three explain how much of the refund would be includable in an itemized return—all of it, part of it, or none of it at all—and the final scenario illustrates how a state refund can interact with the standard deduction.
The IRS notes that “[this] announcement does not affect state tax refunds received in 2018 for tax returns currently being filed,” since the changes to SALT only “[apply] to tax years 2018 to 2025.” For those who want more information, the IRS linked the Form 1040 instructions and Publication 525, Taxable and Nontaxable Income.