State and Local Tax Refunds Video - ExamPrep.ai CPA Review

Lesson: State and Local Tax Refunds

In this lesson, take a breather with Nick Palazzolo, CPA, as you dive into the intricate details of state and local tax refunds and their impact on gross income. Nick breaks down the conditions under which such refunds are considered taxable, starting with the tax implications of interest income on state or local tax refunds. He clearly illustrates the contrast between choosing itemized deductions versus the standard deduction in the previous tax year and how each scenario affects the taxability of any refunds received. Through relatable examples, Nick ensures that even complex concepts are easily grasped, guiding you through illustrative scenarios and reinforcing the material with a summary ideal for revision before tackling multiple choice questions and simulations.

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Video Transcript

Instructor: Nick Palazzolo

Nick Palazzolo is head instructor of ExamPrep.ai CPA Review. Nick's teaching style is engaging & upbeat, combining practical Big 4 tax & assurance expertise with years of 1-on-1 coaching. His lessons are concise and emphasize what you need to know to pass. Whether you're a recent grad or working full-time, we’re confident you can conquer your CPA exams with Nick’s review.

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Stand up, stretch, do what you gotta do. We're having a good time. We're looking through a lot here. This is another point that is a little tricky. So take a pause for a second. Just again, stretch, get some coffee, do what you have to do. Look away from the screen, make sure you are taking care of that body. State and local tax refunds can sometimes be included in an individual's gross income, depending on the taxpayer's deductions in the prior year and the nature of the refund. So let's see how this works. Interest income paid by the state. So if a taxpayer receives interest income on a state or local tax refund, the interest income is always taxable. So same as you file your tax return and the federal government owes you money, but they don't give it to you for a while. So they give you interest because time value money and all that, your money is worth more to you today than it is tomorrow. So you want that money. They give you interest. We understand that now, whether it's your state refund or a federal refund, either way, the interest that you receive on that is considered taxable. So first off, that's point number one, not too wild there. Now let's talk about the itemized deductions in the prior year, standard deduction in the prior year. This is something we will deal with much more when we're talking about itemized deductions, dealing with adjustments to income, all that stuff. So if this doesn't make a hundred percent sense right now, no worries. Like I said, we will talk about many items throughout many different lessons. So if you itemize deductions, and if you're familiar with itemizing deductions, you know that on that schedule

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Federal Taxation of Individuals: Filing Status, Gross Income, & Adjustments

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