If you itemize deductions that include state and local taxes and then receive a refund related to those taxes in the next year, how much if any of the refund must be included in gross income? The tax benefit rule determines the portion of the refund, if any, that is taxable to you. That is, a recovery in the current year is taxable to the extent it produced a tax benefit for you (i.e., a tax deduction) in the prior year. But the determination is complicated for those who are subject to the $10,000 limit on deducting state and local taxes (the SALT limitation applicable to 2018 through 2025). Now the IRS has clarified the computation (Rev. Rul. 2019-11).
Under Rev. Rul. 2019-11, if you received a tax benefit from deducting state and local taxes in a prior year and recover a portion of them in the current year, whether the recovery is of state or local income tax, state or local real estate tax, or state or local personal property tax, the amount includible in gross income is the lesser of:
A rate for a period of less than a year computed as though for a full year.