Prior year State Refund Taxable?

[Ephesians3-14]

I have a client who received in 2022 a $50,000 state refund from an amended return that was prepared. The amended return was for the 2020 tax year.

In 2020, his state and local (and RE taxes) were $144,000 (capped at $10K of course). 

I'm figuring that since he didn't get a tax benefit on the 2020 Sched A for the $50,000 deduction that the refund is not taxable in 2022. Am I thinking through this correctly? 

Would he also need to file a CA tax return for 2022 and pay tax on that refund?

Any help would be appreciated.

[Just-Lisa-Now-]

Your thinking is correct, there is a state refund worksheet that does that math for you and excludes the refund from income automatically....no CA return is needed, thats not income to CA.

[Ephesians3-14]

Yes, but interestingly, on that worksheet (which I was using), it requires you to enter the $50,000 in Part VII. When I do that, it results in taxing the $50,000....still confused. Maybe I should just leave it off of the 2022 tax return all together?

[dkh]

When you are entering information in Part VII are you entering the $50,000 in the taxable amount column?

If yes, wouldn't you enter $0 if you've determined it shouldn't be taxed ?

[Ephesians3-14]

Line 36(c) requires you to enter the $50,000...not necessarily what I think is taxable because that's the purpose (I thought) of the worksheet.

[Just-Lisa-Now-]

Youd complete the 1099G, then on that state refund worksheet, complete the Smart Worksheet below Line 4 of Part 1 with the 2021 information, Ive never entered anything in Part IV

but its just as easy to leave it off, since its not taxable.

[dkh]

Did you enter $0 to 36d after entering the $50000 in 36c ?

[Ephesians3-14]

I didn't enter $0 on Line 36d - so it looks like I have to make that determination and then enter the amount. The software won't look back to 2020 and prepare the taxable amount because the State Tax Refund worksheet is only for the current year (2022). Based on my facts above, I don't think this refund is taxable.

[sjrcpa]

I agree.

You can always rerun the 2020 return with $50K less state tax deducted and see the tax/no tax impact to prove it.