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ptheland writes (in part):

The longer answer: To the extent that the refunded amount didn't provide any tax benefit in 2004 (in this case, due to your being subject to AMT), the refund of that tax is not taxable income.

I reply:

Thanks, Peter. Let me run some numbers. For ordinary taxes, I'm comfortably in the 28% marginal bracket, and I have ample mortgage interest to more than use up the reduction in my itemized deductions. Thus, every relevant dollar of state taxes paid reduces my ordinary income tax by $0.28.

My AMT (Form 1040, Line 44) is $270.91 and I will receive a state tax refund in 2005 of $1,623.86. I have no "unusual" AMT items -- in particular, no capital gains of any sort. Of my refund, $967.54 = $270.91/0.28 is the portion from which I received no tax benefit. Accordingly, the taxable portion of my refund will be $656.32 = $1,623.86 - 967.54. Will I indicate "tax benefit rule" on the appropriate line of next year's 1040? --Bob
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