Why did last year's itemized deductions affect this year's tax?
My software asked for last year's itemized deductions after I entered a state refund. I thought prior-year deductions were done and could not affect the current return. What is the EA concept being tested here?
The software is probably testing the tax benefit rule, not carrying last year's deduction into this year's return. If a taxpayer deducted state income tax as an itemized deduction in Year 1 and then receives a refund of that tax in Year 2, the Year 2 return must ask whether the Year 1 deduction reduced federal tax.
The simple map is:
So the prior-year number matters because it helps compute the taxable recovery. It is not a new current-year deduction, and it does not mean all prior-year itemized deductions are being reused.
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