Problem: In Tax Year 2021, Clayton received a refund from the Franchise Tax Board for the amount of state tax that he overpaid in 2020. He was able to reduce his 2020 federal tax liability by itemizing and claiming a deduction for state and local income taxes paid. On his 2021 return, Clayton may need to report all or part of the state tax refund that he received in 2021 as:
- A credit on both the federal and California returns.
- A refundable credit on the federal return and an adjustment to income on the California return.
- An itemized deduction on both the federal and California returns.
- Taxable income on the federal return and an adjustment to additional income on the California return