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Here's a story that might make you feel better if you weren't one of the 10,000 Mainers receiving a rebate under the Affordable Care Act. Turns out, in some cases the rebates will be taxable.

Why might these refunds be considered taxable? If you are refunded an expense you deducted in a prior year, then the refund can be taxable. This is most commonly seen in state tax refunds. If you deduct state income taxes on your federal return and receive a refund from the state, that refund may be taxable in the tax year it is received. The taxable amount is never in excess of the amount which provided you with a tax savings. As an example, an individual with only one deduction has $6,700 in state taxes withheld in 2011. On her federal tax return, she itemizes state taxes withheld as shown on her W-2. But in this example, she owes $0 to the state, so in 2012 she gets all $6,700 back. The $6,700 is not all taxable, only $1,000, which is the difference between what she'd itemized that year and the standard deduction for 2011: $5,700.

Published in Money

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