Is there a benefit to the $10,000 SALT deduction cap? When are state tax refunds not taxable?

Oh wow, that makes so much sense! I think I've been making this mistake for years then. So just to confirm, if my actual state tax payments (after subtracting the refund) still exceeded $10,000, then I shouldn't have reported the refund as taxable income? Should I file amended returns for the past few years? I'm in California and my state taxes have definitely been over the $10,000 cap even after the refunds.

Yes, if your actual state tax payments (after subtracting the refund) still exceeded $10,000, then the refund shouldn't have been reported as taxable income since you received no tax benefit from that portion of your deduction. Regarding amended returns, you generally can file Form 1040-X to amend returns from the past three tax years. So while you may not be able to recoup everything from the past five years, you could potentially amend the most recent three. Consider if the potential refund amount justifies the time and possible preparation costs of filing amended returns.

How does this tool deal with situations where you itemized some years but took standard deduction in others? My state refunds would only be taxable in years following when I itemized, right?

I'm a bit skeptical of tax analysis tools. How accurate is it compared to just asking my CPA? Does it actually look at your prior year returns or just make estimates?

The tool handles the itemized vs. standard deduction situation perfectly. You're absolutely right that state refunds are only potentially taxable if you itemized in the prior year. If you took the standard deduction, then state refunds from that year aren't taxable at all because you didn't get a tax benefit from them. It's quite accurate because it analyzes your actual tax return documents rather than making estimates. You upload your returns and it extracts the specific numbers. Of course, a good CPA will give you personalized advice, but this is often faster and less expensive if you're comfortable with a DIY approach. Many CPAs actually use similar software to analyze client returns.

Wait, how does this actually work? I thought it was impossible to get a human at the IRS without waiting for hours. Does this just put you in the queue somehow?

Sounds like a scam to me. Why would I pay someone to call the IRS when I can do it myself for free? And how do they magically get through when millions of people can't?

It works by using their system that navigates the IRS phone tree and waits on hold for you. When they reach a human agent, they call you and connect you to that agent who's already on the line. So you don't wait on hold at all. They're not doing anything you couldn't theoretically do yourself, but they're saving you from having to spend hours on hold. They don't have special access to the IRS - they just have technology that waits on hold so you don't have to. Think of it like hiring someone to stand in line for you at the DMV.

Is there a simple rule of thumb to know if your state refund is taxable? Like if my total state/local taxes paid minus refund is still > $10k, then refund isn't taxable?

Yes, there is a pretty straightforward rule of thumb: If your total state and local taxes paid (after subtracting the refund) still exceed $10,000, then your refund isn't taxable. For example, if you paid $13,000 in state/local taxes and received a $2,000 refund, your actual taxes were $11,000. Since that's still above the $10,000 SALT cap, you received no tax benefit from the excess amount that became your refund, so the refund isn't taxable.

Which tax software are you using? I've had issues with TurboTax not correctly handling the state tax refund worksheet when the SALT cap applies.

I'm new here but dealing with this exact same situation! I've been in California for the past 4 years and just realized I might have been making this mistake too. From what I'm reading, it sounds like the math is pretty straightforward - if your total state/local taxes paid minus any refunds still puts you over the $10k SALT cap, then the refund shouldn't be taxable. I'm going to dig through my old returns this weekend to see if I qualify for amendments. Regarding processing times, I've heard mixed things about IRS amended return processing. Some people say 16-20 weeks, others have gotten theirs faster. Might depend on how backed up they are. For the tax tools vs. professional review question - I'm probably going to try the DIY approach first since the calculations seem fairly clear-cut, but if I find anything complicated I'll have my CPA double-check before filing. The potential refund amount will probably determine how much professional help I'm willing to pay for!

I filed amended returns for 2021 and 2022 about 4 months ago and just received my refunds last week, so the processing time was right around 16 weeks for me. Not super fast, but not terrible either. I went the DIY route after using one of the analysis tools mentioned here to double-check my calculations. The math really is straightforward once you understand the concept - if your net state/local taxes (after refunds) exceeded $10k, then you got no federal benefit from the "excess" that later became your refund. One tip: make sure to include a brief explanation letter with your Form 1040-X explaining that you're correcting the taxable portion of state tax refunds due to the SALT cap limitation. I think it helps the IRS processor understand what you're doing rather than just seeing random numbers changed. The refund amounts weren't huge in my case (about $300-400 per year), but it was definitely worth the time to file the amendments. Plus now I know not to make the same mistake going forward!

Thanks for the professional perspective! As someone who's been struggling with this exact issue, it's reassuring to hear from a tax preparer that this is a common oversight. Your point about including ALL state and local taxes (including property taxes) in the $10,000 cap calculation is really important - I almost forgot about my property taxes when doing my initial math. I'm curious though - for clients who discover they've been making this mistake, do you typically recommend they file the amendments themselves or have you prepare them? I'm trying to decide if the potential complexity justifies paying for professional preparation, especially since my situation seems pretty straightforward (California resident, definitely over the SALT cap every year). Also, have you noticed any particular red flags or audit risks when filing multiple years of amendments for this specific issue, or does the IRS generally process these without problems since it's such a common misunderstanding?

@Lindsey Fry Really appreciate you sharing your professional insights! This has been such a confusing area for me personally. I m'in New Jersey and between state income taxes and property taxes, I m'definitely hitting that $10k SALT cap every year. Looking back at my returns, I think I ve'been making this exact mistake since 2018 when the cap took effect. One question for you as a tax professional - when you re'preparing amendments for this issue, do you typically see the IRS request additional documentation, or do they generally accept the corrected calculations at face value? I m'a bit nervous about potentially triggering any additional scrutiny, especially since I d'be filing amendments for multiple years. Also, for someone in my situation where the math seems straightforward clearly (over the SALT cap ,)would you recommend using one of those analysis tools mentioned earlier in the thread, or is it worth paying a professional just to be safe? I m'trying to balance the potential refund amount against the cost of professional preparation.

@Lindsey Fry Thanks for the professional perspective! I m'just getting started on researching this issue and your breakdown is really helpful. I m'in Massachusetts and have been itemizing for years due to high property taxes plus state income taxes. Looking at my rough calculations, I m'definitely hitting the $10k SALT cap each year, but I ve'been dutifully reporting my state refunds as fully taxable income without questioning it. A couple of follow-up questions from a newcomer to this topic: When you mentioned gathering prior "year tax returns, are" you referring to the returns from the year I paid the taxes, or the year I received the refund? I want to make sure I m'looking at the right documents when I start this analysis. Also, is there a specific line or form where I should be looking to find my total state and local tax payments for each year? I assume it would be on Schedule A, but I want to make sure I m'capturing everything correctly when I do my calculations. This community has been so helpful - I had no idea this was even an issue until I started reading through this discussion!