Rev. Rul. 79-15
Rev. Rul. 79-15; 1979-1 C.B. 80
- Cross-Reference
(Also Section 61; 26 CFR 1.61-1.)
- Code Sections
- LanguageEnglish
- Tax Analysts Electronic Citationnot available
ISSUE
Examples of the application of the zero bracket amount in computing the amount of a state income tax refund that is excludable from gross income under the tax benefit rule of section 111 of the Internal Revenue Code of 1954.
FACTS AND HOLDINGS
The taxpayers described below use the cash receipts and disbursements method of accounting, file their returns on a calendar year basis, and elected to itemize deductions on their federal income tax returns filed for 1977. In 1977, the taxpayers paid state income taxes, which they properly deducted under section 164(a)(3) of the Code as itemized deductions on their returns for 1977. In 1978, the taxpayers received refunds of overpayments of the state income taxes paid and deducted in 1977.
The following examples illustrate the amounts of the refunds received in 1978 that are excludable from the taxpayers' gross incomes.
Example 1. A and B filed joint federal income tax returns for 1977 and 1978. For 1977 their adjusted gross income was $20,000, state income tax deduction was $2,000, and other itemized deductions were $5,000. In 1978, A and B received a cash refund of $1,000 of the state income tax paid in 1977.
Tax Table Income
for 1977 without
Tax Table Income deduction for
for 1977 state income tax
------------------ -------------------
Adjusted gross income ____ $20,000 $20,000
Itemized deductions ______ $ 7,000 $ 5,000
Zero bracket amount ______ ( 3,200) ( 3,200)
--------- ---------
Excess itemized deductions ( 3,800) ( 1,800)
--------- ---------
Tax Table Income _________ $16,200 $18,200
========= =========
State income tax deduction
for 1977 _______________ $ 2,000
Tax Table Income for 1977
without deduction for
state income tax _______ $18,200
Tax Table Income for 1977 ( 16,200)
---------
Tax benefit (amount of
state income tax
deduction that resulted
in a reduction of 1977
tax) ___________________ ( 2,000)
---------
Recovery exclusion _______ $ 0
=========
Because the entire $2,000 state income tax deduction resulted in a reduction of 1977 tax, no amount of the $1,000 refund received in 1978 is excludable from gross income, and A and B must include the entire $1,000 refund in their gross income for 1978.
Example 2. C and D filed joint federal income tax returns for 1977 and 1978. For 1977 their adjusted gross income was $30,000, state income tax deduction was $3,000, and other itemized deductions were $2,500. In 1978, C and D received a cash refund of $900 of the state income tax paid in 1977.
Tax Table Income
for 1977 without
Tax Table Income deduction for
for 1977 state income tax
------------------ -------------------
Adjusted gross income ____ $30,000 $30,000
Itemized deductions ______ $ 5,500 $ 2,500
Zero bracket amount ______ ( 3,200) ( 3,200)
--------- ---------
Excess itemized
deductions _____________ ( 2,300) ( 0)
--------- ---------
Tax Table Income _________ $27,700 $30,000
========= =========
State income tax deduction
for 1977 _______________ $ 3,000
Tax Table Income for 1977
without deduction for
state income tax _______ $30,000
Tax Table Income
for 1977 _______________ ( 27,700)
---------
Tax benefit (amount of
state income tax
deduction that resulted
in a reduction of 1977
tax) ___________________ ( 2,300)
---------
Recovery exclusion _______ $ 700
=========
C and D may exclude $700 of the $900 refund received in 1978;
the remaining $200 is includible in their gross income for 1978.
Example 3. E, who had no dependents, filed a federal income tax return for 1977 as a single individual. E's adjusted gross income was $4,000, state income tax deduction was $600, and other itemized deductions were $2,500. In 1978, E received a cash refund of the entire $600 state income tax paid in 1977.
Tax Table Income
for 1977 without
Tax Table Income deduction for
for 1977 state income tax
------------------ -------------------
Adjusted gross income ____ $ 4,000 $ 4,000
Itemized deductions ______ $ 3,100 $ 2,500
Zero bracket amount ______ ( 2,200) ( 2,200)
--------- ---------
Excess itemized
deductions _____________ ( 900) ( 300)
--------- ---------
Tax Table Income _________ $ 3,100 $ 3,700
========= =========
State income tax deduction
for 1977 _______________ $ 600
Tax Table Income for 1977
without deduction for
state income tax ______ $ 3,700
Tax Table Income for
1977/*/ _______________ ( 3,200)
---------
Tax benefit (amount of
state income tax
deduction that resulted
in a reduction of 1977
tax) ___________________ ( 500)
---------
Recovery exclusion _______ $ 100
=========
E may exclude $100 of the $600 refund received in 1978; $500 is
includible in E's gross income for 1978.
* (1977 Tax Table A-Single provides that if the tax table income
is $3200 or less, the tax is zero).
If a taxpayer did not itemize deductions for the year in which the state income tax was paid, no amount of a subsequent refund attributable to that tax is includible in the taxpayer's gross income for the year in which the refund is received, because the taxpayer received no benefit in the earlier year.
The above principles also apply to taxpayers who file their returns on a fiscal year basis. They also apply if a taxpayer receives a credit instead of a cash refund for the overpayment of the previously paid tax.
EFFECT ON OTHER REVENUE RULINGS
Rev. Rul. 56-447, 1956-2 C.B. 102, regarding the application under prior law of section 111 of the Code to refunds of state income taxes, is obsoleted with respect to amounts recovered in taxable years beginning after December 31, 1977, that are attributable to amounts deducted in taxable years beginning after December 31, 1976.
- Cross-Reference
(Also Section 61; 26 CFR 1.61-1.)
- Code Sections
- LanguageEnglish
- Tax Analysts Electronic Citationnot available
