Need help understanding itemized deduction recoveries after filing status change

You're on the right track! When dealing with itemized deduction recoveries with a filing status change, it does get tricky, but you've identified the correct approach. What you're describing is exactly right - if the nondeductible portion of SALT (the amount over the $10k cap) exceeds the state tax refund, then none of the refund becomes taxable income in the current year. The logic is that you didn't receive a tax benefit for that portion of your state taxes, so the refund of those taxes isn't taxable. Publication 525 requires the special worksheets precisely because of the filing status change, but the underlying principle remains the same. The worksheets essentially recalculate what portion (if any) of the state tax deduction actually benefited your cousin in the prior year given the status change. If Worksheet 2a is telling you to STOP and that none of the refund is taxable, then that's your answer. The worksheet is designed to walk you through all the necessary calculations accounting for the filing status change.

I wanted to share my experience with a similar situation. I spent hours trying to figure out these itemized deduction recovery rules and still felt uncertain. I ended up using https://taxr.ai to analyze my tax documents and previous returns. It actually flagged this exact issue and explained that my state refund wasn't taxable because of the SALT cap limitation. The tool analyzed my previous year's Schedule A and current 1099-G, then showed exactly which portions of my refund were taxable vs non-taxable with the filing status change. It walked me through the Pub 525 worksheets step by step and confirmed I was doing it right.

Just wanted to update after trying taxr.ai for my recovery calculation issues. I'm honestly surprised how well it worked for my complicated situation. I uploaded my previous year's return and current 1099-G, and it immediately identified the filing status change issue. It showed me exactly which parts of Publication 525 applied to my situation and walked me through the worksheet calculations. Turns out my state refund WAS partially taxable (about 30% of it) because of how my specific deductions worked out with the filing status change. My regular tax software completely missed this nuance. The document analysis was super thorough - it even explained why part of my refund was taxable in plain English that actually made sense! Saved me hours of research and potentially an incorrect filing.

For anyone struggling with IRS publications or getting clarification on these complex recovery rules, I had luck actually speaking with an IRS representative using https://claimyr.com. I was on hold for literally hours trying to reach someone at the IRS about my itemized deduction recovery question, then found this service that got me through in about 15 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c The IRS agent walked me through the exact worksheet calculations for my situation (MFJ to HoH with state tax refund). Turns out I was calculating it wrong and would have overpaid my taxes by reporting the entire refund as income.

I have to admit I was completely wrong about Claimyr. After my skeptical comment, I decided to try it anyway because I was desperate for help with my itemized deduction recovery calculation after my divorce. I set it up around 2pm, expecting nothing to happen. About 20 minutes later my phone rang and I was connected to an actual IRS tax specialist! She spent almost 30 minutes walking me through the exact Publication 525 worksheets I needed for my situation. Turns out I was about to incorrectly report my entire state tax refund as taxable income, when actually only a small portion was taxable due to the SALT limitation and my filing status change. This literally saved me over $700 in taxes I would have overpaid. I'm still shocked I actually got through to a knowledgeable person who could help with such a specific tax question.

One thing to be careful about with the itemized deduction recovery rules - if you're switching from MFJ to Single, make sure you're only looking at YOUR portion of the state taxes paid/refunded from the joint return. In my case, my ex-wife and I paid about $16k in state taxes on our joint return (over the $10k SALT cap), but my portion was only about $6k. When I got my separate state refund of $2k, I initially thought none would be taxable because of the SALT cap. My accountant pointed out that I needed to look at MY portion of the taxes, not our combined amount.

I had almost this exact situation last year. Make sure you're also checking if your cousin had other Schedule A deductions that might impact the recovery calculation! In my case, I focused so much on the SALT cap that I forgot to consider how my charitable contributions and medical expenses affected the overall calculation on Worksheet 2. This actually made a portion of my state refund taxable even though I thought the SALT cap would protect me.

You're absolutely right to be careful with this calculation! I went through a similar situation last year when I switched from MFJ to Single after my divorce. The key insight you've identified is correct - if the nondeductible portion of your SALT (the amount over $10k) exceeds your state tax refund, then none of the refund is taxable. This is because you didn't receive a tax benefit for that portion of your state taxes in the prior year. However, I'd recommend double-checking a few things: 1. Make sure you're only considering your cousin's portion of the joint SALT deduction, not the full amount from the MFJ return 2. Verify that all other itemized deductions from the prior year are properly accounted for in the worksheet calculations 3. Consider whether any of the state taxes that generated the refund were actually deductible under the prior year's circumstances The Publication 525 worksheets are designed exactly for these filing status change situations. If Worksheet 2a is indicating that none of the refund is taxable, that's likely correct. But given the complexity and potential for errors, you might want to have a tax professional review the calculation before filing, especially since the stakes are relatively high with a $3,600 refund.